Gujarat High Court
Kirtilal Ravchandbhai Sanghavi vs Reserve Bank Of India on 2 January, 2023
Author: Aravind Kumar
Bench: Aravind Kumar, Ashutosh J. Shastri
C/LPA/596/2022 CAV JUDGMENT DATED: 02/01/2023
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/LETTERS PATENT APPEAL NO. 596 of 2022
In R/SPECIAL CIVIL APPLICATION NO. 2518 of 2022
With
CIVIL APPLICATION (FOR STAY) NO. 1 of 2022
In R/LETTERS PATENT APPEAL NO. 596 of 2022
With
R/LETTERS PATENT APPEAL NO. 597 of 2022
In SPECIAL CIVIL APPLICATION NO. 2943 of 2022
With
CIVIL APPLICATION (FOR STAY) NO. 1 of 2022
In R/LETTERS PATENT APPEAL NO. 597 of 2022
In SPECIAL CIVIL APPLICATION NO. 2943 of 2022
=============================================
KIRTILAL RAVCHANDBHAI SANGHAVI
Versus
RESERVE BANK OF INDIA
=============================================
Appearance:
MR DEVEN PARIKH, SENIOR ADVOCATE WITH MR SHAKTI S
JADEJA(5491) for the Appellant(s) No. 1,2,3,4,5,6,7,8
MR SP MAJMUDAR(3456) for the Appellant(s) No. 1,2,3,4,5,6,7,8
MR BH BHAGAT(153) for the Respondent(s) No. 2
RULE SERVED for the Respondent(s) No. 1
=============================================
CORAM:HONOURABLE THE CHIEF JUSTICE MR. JUSTICE ARAVIND
KUMAR
and
HONOURABLE MR. JUSTICE ASHUTOSH J. SHASTRI
Date : 02/01/2023
COMMON CAV JUDGMENT
(PER : HONOURABLE THE CHIEF JUSTICE MR. JUSTICE ARAVIND KUMAR)
1. In these intra-court appeals the order dated
10.02.2022 passed in Special Civil Application No.2518 of
2022 is under challenge whereunder the learned Single
Judge has dismissed the Special Civil Application and
affirmed the impugned orders dated 01.09.2021
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(Annexure-N) passed by second respondent, order dated
02.02.2021 (Annexure-L), notices / communications dated
18.09.2021/ 28.08.2020 (Annexure-O) issued by second
respondent.
BRIEF BACKGROUND OF THE CASE :
2. Parties are referred to as per their rank before
the learned Single Judge. Petitioners are the Ex-Directors
of Sanghavi Exports International Private Limited (at
present under liquidation) which was then engaged in the
business of manufacturing and export of cut and polished
diamond and diamond studded jewellary. Said company
had availed certain financial facilities from the group of
consortium members wherein the Bank of India was the
lead bank and second respondent was one of the
consortium member. Said company defaulted in
repayment of loans and came to be classified as a Non-
performing Asset (NPA) by the second respondent.
Second respondent has initiated recovery proceedings
before the Debt Recovery Tribunal for recovery of dues
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by filing an application under Section 19 of DRT Act. The
lead bank has initiated proceedings under the
Securitization and Reconstruction of Financial Assets and
Enforcement of Security Interest Act, 2002 ('SARFAESI
Act', for short) which is said to have been challenged by
the petitioners before the Debt Recovery Tribunal,
Ahmedabad.
3. The lead bank also initiated insolvency
proceedings before National Company Law Tribunal
(NCLT) which ordered for liquidating the borrower
company and Liquidator came to be appointed. Again the
lead bank is said to have initiated proceedings under the
SARFAESI Act calling upon the borrower to repay the
outstanding amount of 822.30 Crores and challenge to
said action is said to be now pending before the Debt
Recovery Tribunal-II, Ahmedabad.
4. Second respondent has issued a show cause
notice dated 28.08.2020 to petitioners and others as to
why the names of petitioners should not be included in
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the list of 'Willful Defaulters' as per Reserve Bank of India
(for short 'RBI') guidelines. There were exchange of
communications pursuant to the said show cause notice
between the parties and after affording personal hearing,
order dated 02.02.2021 (Annexure-L) came to be passed.
Second respondent declared the petitioners as 'Willful
Defaulters' on the grounds mentioned in the show cause
notice. Fifteen days time was granted to the petitioners to
have their further submission - representation for
consideration by Review Committee on Willful Defaulters
('WDRC', for short). Accordingly, petitioners submitted a
representation dated 15.02.2021 reiterating the reply
given to the show cause notice and relied upon its earlier
representations. Thereafter, respondent No.2 by order
dated 01.09.2021 has confirmed the decision of WDC and
declared the petitioners as Willful Defaulters. Pursuant to
the same, petitioners have been called upon to pay the
outstanding amount to the second respondent bank
within 15 days failing petitioners were informed that
bank would proceed to publish the names, photographs
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and other details of petitioners in the
newspapers/magazines.
5. Being aggrieved by the same, Special Civil
Application came to be filed and as already observed
hereinabove same has been dismissed by the learned
Single Judge by arriving at a conclusion that there was
breach of both clauses of the circular dated 01.07.2015
issued by RBI namely Clause 2.2.1 (c) and (d) by the
petitioners. It has been further held that while exercising
the jurisdiction under Articles 226 and 227 of the
Constitution of India, the writ Court would not sit in
appeal over the findings of fact arrived at by WDIC or
WDRC and hence, held that the impugned orders did not
warrant interference. Hence, these intra-court appeals.
6. We have heard the arguments of Shri Deven
Parikh, learned Senior Counsel appearing for appellants.
Respondent No.1 is served and unrepresented.
Shri B.H.Bhagat, learned advocate has addressed the
arguments on behalf of second respondent.
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7. It is the contention of Shri Deven Parikh,
learned Senior Counsel appearing for the writ applicants
that learned Single Judge having arrived at a conclusion
that WDIC has not assigned any reason in the order dated
02.02.2021, ought not to have dismissed the Special Civil
Application on the ground of said Committee having
considered all submissions of the writ applicants and
having assigned reasons for declaring the writ applicants
as willful defaulters. He would also contend that as per
the mandate of Clause 3(a) and 3(b) of the RBI circular,
there should have been evidence on record to show
'Willful Defaulter' on the part of the borrowing company
and WDIC ought to have recorded the fact of willful
defaulter and only after recording the same could have
been reviewed by the Review Committee. Hence,
contending that order of WDIC is itself not in consonance
with the guidelines issued by RBI, same ought to have
been quashed. He would further contend that order dated
02.02.2021 is in violation of principles of natural justice
inasmuch as the said order refers to the audit reports of
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M/s.Deloitte and M/s.Amit Ray and Co., the copies of
which though demanded by the writ applicants were
never furnished. He would also contend that RBI circular
dated 01.07.2015 mandates two stages to be followed by
the authorities namely (a) the role of Identification
Committee by declaring the noticee as a defaulter by
passing a reasoned order and (b) approval of the said
order by the Review Committee also by a considered
order which according to him are lacking in the instant
case. He would submit that willful default has been
defined under the circular and 2nd respondent ought to
have examined the objections filed by petitioners and this
precise exercise ought to have been undertaken by the
Identification Committee and same having not been
undertaken has resulted in a prejudicial order being
passed and as such its reviewing by the WDRC is an
empty formality and would not serve any purpose. He
would submit, had WDIC assigned reasons, the
consequential question would have arisen before the
WDRC to review the said reasoning by evaluating the
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same and in the instant case said exercise having not
been undertaken by WDIC for want of reasons having not
been assigned by it, question of reviewing a non-reasoned
order had not arisen at all.
8. He would also submit that show cause notice
dated 28.08.2020 though speaks of diversion of funds and
by relying upon two audit reports which undisputedly had
not been furnished to petitioners though sought for has
resulted in impugned orders being passed by WDIC and
WDRC which are liable to be quashed. Even otherwise,
said audit reports would disclose about the outstanding
amounts to be received by petitioners and it does not say
a word about any diversion of funds having been carried
out. Hence, he prays for appeals being allowed. In
support of his submissions, he has relied upon the
following judgments :
(i) Natwar Singh vs. Director of
Enforcement and another, reported in
(2010) 13 SCC 255.
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(ii) State Bank of India vs. Jah Developers
Private Limited, reported in 2019 AIJEL-
SC 64236.
9. Per contra, Shri B.H.Bhagat, learned advocate
appearing for second respondent would support the
impugned orders and he would contend that second
respondent has followed the mechanism as provided in
the master circular before arrived at conclusion that
petitioner has to be declared as "Willful Defaulter". He
would contend that show cause notice was followed by
personal hearing notice and after extending opportunity,
considering the replies submitted by petitioners, a
detailed order has been passed by the WDIC which
eventually was reviewed by the WDRC after extending
personal hearing on various occasions which had
culminated in the order being passed on 29.06.2021
(Annexure-N). He would submit that order of WDIC would
become final only upon confirmation by WDRC and there
is no procedural irregularity committed as sought to be
made out by petitioners.
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10. He would also submit that petitioners are
squarely covered by the provisions of Clauses 2.1.3 (b),
2.1.1 (c) and 2.2.1 (d) of master circular dated 01.07.2015
and would draw the attention of the Court to the order of
WDRC which clearly culls out and refers to breach of both
the clauses of circular namely diversion and transferring
of funds and routing of funds which was based on the
forensic audit reports. Hence, he would submit that there
is no error committed by the authorities and prays for
dismissal of the appeals.
11. Having heard the learned advocates appearing
for the parties and after bestowing our careful and
anxious consideration to the rival contentions raised at
the Bar, we are of the considered view that following
points would arise for our consideration :
(i) Whether the order dated 02.02.2021
passed by Willful Defaulter Identification
Committee - WDIC is liable to be set
aside on any grounds including the
ground of violation of principles of
natural justice ?
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OR
Whether the order dated 02.02.2021 is
liable to be set aside on the ground of
violation of principles of natural justice?
(ii) Whether the order passed by the Willful
Defaulters Review Committee - WDRC
dated 29.06.2021 (Annexure-N) suffers
from any infirmity either in law or on
facts calling for our interference?
(iii) What order ?
RE : POINT NO.1 :
12. At the outset, it requires to be noticed that
thrust of the arguments advanced on behalf of the writ
applicants is to the effect that order dated 02.02.2021
passed by WDIC vide Annexure-L is to be quashed on the
ground that said order was not preceded by a show cause
notice dated 28.08.2020 (Annexure-E) under which the
second respondent refers to the report of M/s.Deloitte as
well as M/s.Amit Ray and Co. has been referred to and
despite a demand being made by the petitioners seeking
copies of the reports by communication dated
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10.09.2020, same has not been furnished and as such, all
consequential proceedings are liable to be quashed as it
was in violation of principles of natural justice.
13. There cannot be any dispute with regard to the
proposition that when an authority intends to pass an
order against a person who is likely to be aggrieved or
affected, such person cannot be condemned or found fault
with unless extended a fair opportunity of hearing.
Natural justice or fair administrative procedure is
regarded as an important procedural safeguard against
an undue exercise of such power by the administration.
14. The Hon'ble Apex Court in the matter of Union
of India and another vs. Tulsiram Patel and others,
reported in AIR 1985 SC 1416 has held that natural
justice has assumed significance in modern
administration process and held them as 'foundational
and fundamental concepts' which are part of legal and
judicial procedures. Natural justice is mainly the
procedural concept. If an action of the authority is
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contrary to the doctrine of audi alteram partem, such act
would be frowned upon. The whole edifice is built upon
the well-known adage that no one may be condemned
unheard. It is the fundamental principle that a person
against whom some action is proposed to be taken, or
whose right or interest is going to be affected adversely,
ought to be given a reasonable opportunity to defend
himself. Procedural fairness is thus regarded as an
integral element of administrative process. The principle
of natural justice also gives a sense of participation to the
concerned person in administrative decision making
which can by itself be justified as democratic value.
Natural justice also serves as a means of making agencies
accountable. If a hearing has been extended to the
affected person, the adjudicating authority would be in a
better position to review the administrative action.
Keeping these principles in mind when we turn our
attention to the facts on hand, it would indicate that as
per the circular dated 01.07.2015 (Annexure-P), the
Reserve Bank of India has issued the said circular to
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disseminate credit information pertaining to willful
defaulters for cautioning banks and financial institutions
so as to ensure that further bank finance is not made
available to such of those persons who are to be declared
as willful defaulters. The guidelines issued under such
circular are required to be followed by the authorities in
its letter and spirit.
15. The Hon'ble Apex Court in the case of State
Bank of India vs. Jah Developers Private Limited
(supra), while examining the issue as to whether a
lawyer has any right under Section 30 of the Advocates
Act, 1961, to appear before the In-house Committee as
mentioned in the extant circular after having held that no
right is vested in a lawyer in the In-house proceedings
contained in the revised circular dated 01.07.2015
(Annexure-P herein). After having considered various
clauses of the circular, it has been held :
"21. Given the above conspectus of case law,
we are of the view that there is no right to be
represented by a lawyer in the in-house
proceedings contained in paragraph 3 of the
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Revised Circular dated 01.07.2015, as it is
clear that the events of wilful default as
mentioned in paragraph 2.1.3 would only relate
to the individual facts of each case. What has
typically to be discovered is whether a unit has
defaulted in making its payment obligations
even when it has the capacity to honour the
said obligations; or that it has borrowed funds
which are diverted for other purposes, or
siphoned off funds so that the funds have not
been utilised for the specific purpose for which
the finance was made available. Whether a
default is intentional, deliberate, and
calculated is again a question of fact which the
lender may put to the borrower in a show
cause notice to elicit the borrower's
submissions on the same. However, we are of
the view that Article 19(1)(g) is attracted in the
facts of the present case as the moment a
person is declared to be a wilful defaulter, the
impact on its fundamental right to carry on
business is direct and immediate. This is for
the reason that no additional facilities can be
granted by anybank/financial institutions, and
entrepreneurs/promoters would be barred from
institutional finance for five years.
Banks/financial institutions can even change
the management of the wilful defaulter, and a
promoter/director of a wilful defaulter cannot
be made promoter or director of any other
borrower company. Equally, under Section
29A of the Insolvency and Bankruptcy Code,
2016, a wilful defaulter cannot even apply to be
a resolution applicant. Given these drastic
consequences, it is clear that the Revised
Circular, being in public interest, must be
construed reasonably. This being so, and given
the fact that paragraph 3 of the Master
Circular dated 01.07.2013 permitted the
borrower to make a representation within 15
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days of the preliminary decision of the First
Committee, we are of the view that first and
foremost, the Committee comprising of the
Executive Director and two other senior
officials, being the First Committee, after
following paragraph 3(b) of the Revised
Circular dated 01.07.2015, must give its order
to the borrower as soon as it is made. The
borrower can then represent against such
order within a period of 15 days to the Review
Committee. Such written representation can be
a full representation on facts and law (if any).
The Review Committee must then pass a
reasoned order on such representation which
must then be served on the borrower. Given
the fact that the earlier Master Circular dated
01.07.2013 itself considered such steps to be
reasonable, we incorporate all these steps into
the Revised Circular dated 01.07.2015. The
impugned judgment is, therefore, set aside,
and the appeals are allowed in terms of our
judgment. We thank the learned Amicus
Curiae, Shri Parag Tripathi, for his valuable
assistance to this Court."
16. In the show cause notice dated 28.08.2020
issued to the petitioners, it has been notified to the
following effect :
"Diversion of funds :
The unit has defaulted in meeting its
payment - repayment obligations to the
lender and has not utilized the finance
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from the lender for the specific purposes
for which finance was availed of but has
diverted the funds for other purpose."
17. To arrive at the aforesaid conclusion, it has
referred to the reports of M/s.Deloitte as also the report
of M/s.Amit Ray and Co.
18. Insofar as second ground on which the second
respondent has proposed to declare the petitioners as
willful defaulters is on the ground of "routing of funds
through any bank other than the lender bank or members
of consortium without prior permission of the lender".
The prime grievance of the learned Senior Counsel
appearing for the petitioners is that the said show cause
notice refers to two audit reports and immediately on
receipt of the show cause notice, petitioners by their
reply dated 10.09.2021 had sought for copies of the said
two reports which undisputedly has not been furnished
till date and as such, the order of WDIC is in violation of
principles of natural justice. In reply dated 15.02.2021
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(Annexure-M) submitted on behalf of the petitioners the
very same petitioners have commented on the forensic
audit reports. To cut short further dwelling or discussion
of this aspect, it would suffice to extract the very reply
submitted by the petitioners themselves namely reply
dated 15.02.2021 (Annexure-M) wherein at paragraph-3
they have stated to the following effect :
"3. On forensic audit :
(i) Your bank has got the forensic audit
conducted, twice. No other bank, under
consortium arrangement, including the
lead bank, had then instructed for
forensic audit. You have cited two reports
on the forensic audits, by M/s.Deloitte
and M/s.Amit Ray & Co. who submitted
reports on 18.07.2017 and 22.05.2020,
respectively. We advise that
(a) xxxxx
(b) xxxxx
(i) xxxxx
(ii) xxxxx
(iii) Vide Criteria No. 2.2.1 (c), as
stated vide your letter under reference,
on willful default, regarding transferring
of funds to subsidiaries/ group
companies, we say that both the forensic
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auditors have stated different
observations. The observations have been
conclusively replied vide individual
representation dated 12-01-2021 which
form an integral part of our present reply.
The credits as stated in the report dated
18-07-2017, pertain to payments for raw
diamonds and raw gold. Since, after
classification of account as NPA on 31-12-
2015, by your bank, the operations in the
account with your bank, were curtailed,
by default and operations were carried
out with other banks/ lending institutions,
to continue business transactions. It
appears that the forensic auditor, could
not have access to the operations with
other banks/ lending institutions. The
alleged credits pertain to forex
transactions, could not evade exposure in
the books of account/ statements. The
facts have since been submitted vide
representations dated 12-01-2021."
19. There is discussion with reference to two audit
reports and petitioners have tried to find fault with said
audit reports by going into merits of the audit reports. As
such, it is too late in the day for petitioners to contend
that they were not aware of the reports or in other words,
non-furnishing of the audit reports had prejudiced their
defense. It is only an afterthought and raised to stave off
the proceedings initiated by the second respondent under
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which they had expressed intention to declare petitioners
as willful defaulters. By supplying these reports afresh for
being commented upon by the petitioners would not have
altered the position nor would have changed the line of
defense of petitioners. There may be situations wherein
for some reason - perhaps because the evidence against
the individual is thought to be utterly compelling, it is felt
that a fair hearing "would make no difference" - meaning
that hearing would not change the conclusion reached by
the decision maker - then no legal duty to supply a
hearing arises. This approach was endorsed by Lord
Wilberforce in Malloch vs. Aberdeen Corporation
reported in (1971) 2 ALL ER 1278 (HL), whereunder it
was held 'breach of procedure... cannot give rise to a
remedy in the courts, unless behind it there is something
of substance which has been lost by the failure. The court
dos not act in vain'.
20. The aforesaid comments were relied upon by
Brandon (L) Justice in Cinnamond v. British Airports
Authority - (1980) 2 All ER 368 (CA) and held :
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" ... no one can complain of not being
given an opportunity to make
representations if such an opportunity
would have availed him nothing."
In such situations, fair procedure appears to
serve no purpose since 'right' result can be secured
without according such treatment to the individual.
21. Thus, what can be deduced from the aforesaid
analysis would be that every violation of a facet of natural
justice may not lead to a conclusion that order passed is
always null and void. The validity of the order has to be
decided on the touchstone of 'prejudice'. The ultimate test
is always the same i.e. the test of prejudice or the test of
fair hearing. The Hon'ble Apex Court in ECIL vs. B.
Karunakar - (1993) 4 SCC 727, while summing up the
discussion and answering various questions posed
therein, had to say qua the prejudice principle as under:
"30. Hence the incidental questions raised
above may be answered as follows:
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xx xx xx
(v) The next question to be answered is
what is the effect on the order of
punishment when the report of the
enquiry officer is not furnished to the
employee and what relief should be
granted to him in such cases. The answer
to this question has to be relative to the
punishment awarded. When the employee
is dismissed or removed from service and
the inquiry is set aside because the report
is not furnished to him, in some cases the
non- furnishing of the report may have
prejudiced him gravely while in other
cases it may have made no difference to
the ultimate punishment awarded to him.
Hence to direct reinstatement of the
employee with back-wages in all cases is
to reduce the rules of justice to a
mechanical ritual. The theory of
reasonable opportunity and the principles
of natural justice have been evolved to
uphold the rule of law and to assist the
individual to vindicate his just rights. They
are not incantations to be invoked nor
rites to be performed on all and sundry
occasions. Whether in fact, prejudice has
been caused to the employee or not on
account of the denial to him of the report,
has to be considered on the facts and
circumstances of each case. Where,
therefore, even after the furnishing of the
report, no different consequence would
have followed, it would be a perversion of
justice to permit the employee to resume
duty and to get all the consequential
benefits. It amounts to rewarding the
dishonest and the guilty and thus to
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stretching the concept of justice to
illogical and exasperating limits. It
amounts to an "unnatural expansion of
natural justice" which in itself is
antithetical to justice."
22. Thus, in all cases of non-furnishing of the
copies whenever demanded which would not result in
prejudice would not find favour for such order being set
aside on the premise of natural justice having been
violated. In such circumstances, it would also not warrant
remanding of the matter to the authorities for redoing the
exercise as it would be an empty formality and would
serve no purpose and parties would be back to square
one. As to whether any purpose would be served in
remanding the case, this Court will have to keep in mind
whether any prejudice is caused to the person against
whom the action is taken. This has been answered in B.
Karunakar's case (supra) by the Hon'ble Apex Court in
the following terms :
"31. Hence, in all cases where the enquiry
officer's report is not furnished to the
delinquent employee in the disciplinary
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proceedings, the Courts and Tribunals
should cause the copy of the report to be
furnished to the aggrieved employee if he
has not already secured it before coming
to the Court/ Tribunal and given the
employee an opportunity to show how his
or her case was prejudiced because of the
non-supply of the report. If after hearing
the parties, the Court/Tribunal comes to
the conclusion that the non-supply of the
report would have made no difference to
the ultimate findings and the punishment
given, the Court/Tribunal should not
interfere with the order of punishment.
The Court/ Tribunal should not
mechanically set aside the order of
punishment on the ground that the report
was not furnished as it regrettably being
done at present. The courts should avoid
resorting to short cuts. Since it is the
Courts/Tribunals which will apply their
judicial mind to the question and give their
reasons for setting aside or not setting
aside the order of punishment, (and not
any internal appellate or revisional
authority), there would be neither a breach
of the principles of natural justice nor a
denial of the reasonable opportunity. It is
only if the Court/Tribunal finds that the
furnishing of the report would have made a
difference to the result in the case that it
should set aside the order of punishment."
23. Keeping the aforesaid principles in mind, it will
have to be examined when there is an infraction of
principles of natural justice is alleged it will have to be
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examined as to whether any purpose would be served in
remitting the case to the authority to pass fresh orders
after furnishing the copies. However, said situation does
not arise at all in the instant case. Firstly, the copies of
the audit reports were very much available with the
petitioners and petitioners themselves have delved upon
these reports in their reply submitted to the show cause
notice and as such the boogie of violation of principles of
natural justice raised by the petitioners on the ground of
non-furnishing of copies referred to in the impugned
order has resulted in great prejudice is liable to be
considered only for the purposes of outright rejection and
we do so. Secondly, we notice that copies of the said two
audit reports was very much in the know-how of the
petitioners and particularly when petitioners themselves
have dealt with in detail in their reply submitted to the
second respondent. Admitting for a moment that copies of
audit reports ought to have been furnished to the
petitioners on demand being made by them and on
account of non-furnishing the same has resulted in
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violation of principles of natural justice and consequently,
matter has to be remanded back to the authorities is an
argument, which cannot be accepted in the instant case
as it would only be an empty formality and would serve
no fruitful purpose since petitioners were fully aware of
the contents of the report. In other words, the doctrine of
'useless formality theory' would surface, which aspect has
received the consideration of the Hon'ble Apex Court in
the case of M.C.Mehta vs. Union of India - (1999) 6
SCC 237, and held to the following effect :
"22. Before we go into the final aspect of
this contention, we would like to state that
case relating to breach of natural justice do
also occur where all facts are not admitted or
are not all beyond dispute. In the context of
those cases there is a considerable case-law
and literature as to whether relief can be
refused even if the court thinks that the case
of the applicant is not one of `real substance'
or that there is no substantial possibility of
his success or that the result will not be
different, even if natural justice is followed.
See Malloch v. Aberdeen Corpn., (per Lord
Reid and Lord Wilberforce), Glynn v. Keele
University, Cinnamond v. British Airports
Authority and other cases where such a view
has been held. The latest addition to this view
is R. v. Ealing Magistrates. Court, ex p.
Fannaran, (Admn. LR at p. 358) (See de
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Smith, Suppl. P.89) (1998) where Straughton,
L.J. held that there must be `demonstrable
beyond doubt' that the result would have
been different. Lord Woolf in Lloyd v.
McMohan, (WLR at p. 8620 has also not
disfavoured refusal of discretion in certain
cases of breach of natural justice. The New
Zealand Court in McCarthy v. Grant, however
goes halfway when it says that (as in the case
of bias), it is sufficient for the applicant to
show that there is `real likelihood-not
certainty- of prejudice.' On the other hand,
Garner Administrative Law (8th Edn. 1996.
pp.271-72) says that slight proof that the
result would have been different is sufficient.
On the other side of the argument, we have
apart from Ridge v. Baldwin, Megarry, J. in
John v. Rees, stating that there are always
`open and shut cases. and no absolute rule of
proof of prejudice can be laid down. Merits
are not for the court but for the authority to
consider. Ackner, J has said that the `useless
formality theory' is a dangerous one and,
however inconvenient, natural justice must
be followed. His Lordship observed that
`convenience and justice are often not on
speaking terms' More recently, Lord
Bingham has deprecated the `useless
formality theory' in R. v. Chief Constable of
the Thames Valley Police Forces, ex p. Cotton
by giving six reasons (see also his article
`Should Public Law Remedies be
Discretionary?" 1991 PL. p.64). A detailed
and emphatic criticism of the `useless
formality theory. has been made much earlier
in `Natural Justice, Substance or Shadow' by
Prof. D.H. Clark of Canada (see 1975
PL.pp.27-63) contending that Malloch (supra)
and Glynn (supra) were wrongly decided.
Foulkes (Administrative Law, 8th Edn. 1996,
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p.323), Craig (Administrative Law, 3rd Edn.
P.596) and others say that the court cannot
prejudge what is to be decided by the
decision-making authority. De Smith (5th
Edn. 1994, paras 10.031 to 10.036) says
courts have not yet committed themselves to
any one view though discretion is always with
the court. Wade (Administrative Law, 5th
Edn. 1994, pp.526-30) says that while futile
writs may not be issued, a distinction has to
be made according to the nature of the
decision. Thus, in relation to cases other than
those relating to admitted or indisputable
facts, there is a considerable divergence of
opinion whether the applicant can be
compelled to prove that the outcome will be
in his favour or he has to prove a case of
substance or if he can prove a `real
likelihood' of success or if he is entitled to
relief even if there is some remote chance of
success. We may, however, point out that
even in cases where the facts are not all
admitted or beyond dispute, there is a
considerable unanimity that the courts can,
in exercise of their `discretion', refuse
certiorari, prohibition, mandamus or
injunction even though natural justice is not
followed. We may also state that there is yet
another line of cases as in State Bank of
Patiala v. S.K. Sharma, and Rajendra Singh v.
State of M.P., that even in relation to
statutory provisions requiring notice, a
distinction is to be made between cases
where the provision is intended for individual
benefit and where a provision is intended to
protect public interest. In the former case, it
can be waived while in the case of the latter,
it cannot be waived."
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24. In that view of the matter, Point No.1 deserves to
be answered against the writ applicants and in favour of
respondent No.2.
RE : POINT NO.2 :
25. The Circular dated 01.07.2015 issued by the
Reserve Bank of India describes 'Willful Default' under
Clause 2.1.3 as under :
"2.1.3 Wilful Default: A 'wilful
default' would be deemed to have
occurred if any of the following events is
noted :
(a) The unit has defaulted in meeting
its payment/repayment obligations to the
lender even when it has the capacity to
honour the said obligations.
(b) The unit has defaulted in meeting
its payment/repayment obligations to the
lender and has not utilised the finance
from the lender for the specific purposes
for which finance was availed of but has
diverted the funds for other purposes.
(c) The unit has defaulted in meeting
its payment/repayment obligations to the
lender and has siphoned off the funds so
that the funds have not been utilised for
the specific purpose for which finance
was availed of, nor are the funds
available with the unit in the form of
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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 wilful 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
categorized as wilful must be intentional
deliberate and calculated."
26. Clause 3 of the Circular describes the
mechanism for identification of the Willful Defaulters. It
reads :
"3. Mechanism for identification of
Wilful Defaulters :
The mechanism referred to in
paragraph 2.5 above should generally
include the following :
(a) The evidence of wilful default
on the part of the borrowing company
and its promoter / whole-time director at
the relevant time should be examined by
a Committee headed by an Executive
Director or equivalent and consisting of
two other senior officers of the rank of
GM / DGM.
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(b) If the Committee concludes
that an event of wilful default has
occurred, it shall issue a Show Cause
Notice to the concerned borrower and
the promoter / whole-time director and
call for their submissions and after
considering their submissions issue an
order recording the fact of wilful default
and the reasons for the same. An
opportunity should be given to the
borrower and the promoter / whole-time
director for a personal hearing if the
Committee feels such an opportunity is
necessary.
(c) The order of the Committee
should be reviewed by another
Committee headed by the Chairman /
Chairman & Managing Director & 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 wilful
defaulter, then the Review Committee
need not be set up to review such
decisions. xxx xxx xxx"
27. The order of the Willful Defaulter Identification
Committee dated 02.02.2021 has already been upheld by
us while answering / adjudicating Point No.1 formulated
hereinabove. To arrive at a conclusion that the writ
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applicant unit had defaulted in meeting its
payment/repayment obligations to the lender and had not
utilized the finance from the lender for the specific
purposes for which finances were availed but had
diverted the funds for other purposes had noticed that out
of 16 entities accounts for Rs.609.59 Crores as against
the total debtors of Rs.708.23 Crores and the said
Rs.609.59 Crores are related to associated companies. It
has been further noted that on analysis of bank
statements it was observed that Rs.22.03 Crores were
paid to Crystal Gems (HK) Limited, Rs.17.14 Crores paid
to Radiant Exports, Rs.29.88 Crores was paid to Smile
Jewellery LLC and Rs.2.34 Crores was paid to Sanghavi
Diamonds Inc. (NY) and none of these four entities had
appeared in the Monthly Creditors Statements. It was
also noticed that the outstanding balances from the four
related or associated parties was to the tune of Rs.609.59
Crores and no legal action was taken by the company in
respective countries for recovery of the said amounts. For
these reasons as more fully described in the order dated
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02.02.2021, there has been an order passed declaring the
petitioners namely writ applicant as willful defaulters. A
perusal of Clause 3(b) of the Circular dated 01.07.2015
referred to hereinabove would indicate that if the WDIC
were to conclude that an event of willful default has
occurred, it is required to issue a show cause notice to
the borrower and the Promoters/Whole-Time Director and
after calling for their submissions and after considering
their submissions issue an order recording the fact of
willful default and the reasons for the same. As could be
noticed from the order dated 02.02.2021, the reasons
have been assigned after considering the submissions of
the concerned borrower and the Promoter/Director.
Hence, it cannot be gainsaid by petitioner that there has
been no reason assigned in the order passed for
declaration of Willful Defaulter. In this background, we
are not inclined to subscribe to the view or opinion
expressed by the learned Single Judge under the
impugned order dated 10.02.2022 passed in Special Civil
Application No.2518 of 2022. Be that as it may. The
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learned Single Judge in the same breath has further
concluded that the Review Committee has considered all
the submissions of the petitioners and has assigned
reasons for declaring the petitioners as Willful Defaulters.
In fact, this view also gets support from the judgment of
the Hon'ble Apex Court in the case of State Bank of
India vs. Jah Developers Private Limited (supra),
whereunder it has been held to the following effect :
"21. Given the above conspectus of case
law, we are of the view that there is no right
to be represented by a lawyer in the in-house
proceedings contained in paragraph 3 of the
Revised Circular dated 01.07.2015, as it is
clear that the events of wilful default as
mentioned in paragraph 2.1.3 would only
relate to the individual facts of each case.
What has typically to be discovered is
whether a unit has defaulted in making its
payment obligations even when it has the
capacity to honour the said obligations; or
that it has borrowed funds which are diverted
for other purposes, or siphoned off funds so
that the funds have not been utilised for the
specific purpose for which the finance was
made available. Whether a default is
intentional, deliberate, and calculated is again
a question of fact which the lender may put to
the borrower in a show cause notice to elicit
the borrower's submissions on the same.
However, we are of the view that Article 19(1)
(g) is attracted in the facts of the present case
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as the moment a person is declared to be a
wilful defaulter, the impact on its fundamental
right to carry on business is direct and
immediate. This is for the reason that no
additional facilities can be granted by any
bank/financial institutions, and entrepreneurs/
promoters would be barred from institutional
finance for five years. Banks/financial
institutions can even change the management
of the wilful defaulter, and a promoter/
director of a wilful defaulter cannot be made
promoter or director of any other borrower
company. Equally, under Section 29A of the
Insolvency and Bankruptcy Code, 2016, a
wilful defaulter cannot even apply to be a
resolution applicant. Given these drastic
consequences, it is clear that the Revised
Circular, being in public interest, must be
construed reasonably. This being so, and
given the fact that paragraph 3 of the Master
Circular dated 01.07.2013 permitted the
borrower to make a representation within 15
days of the preliminary decision of the First
Committee, we are of the view that first and
foremost, the Committee comprising of the
Executive Director and two other senior
officials, being the First Committee, after
following paragraph 3(b) of the Revised
Circular dated 01.07.2015, must give its order
to the borrower as soon as it is made. The
borrower can then represent against such
order within a period of 15 days to the Review
Committee. Such written representation can
be a full representation on facts and law (if
any). The Review Committee must then pass a
reasoned order on such representation which
must then be served on the borrower. Given
the fact xxx xxx xxx valuable assistance to this
Court."
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28. In the aforesaid background, when the order of
the Review Committee - WDRC dated 29.06.2021
(Annexure-N) is perused, it would clearly indicate that on
the observations of WDRC the response of the Promoters/
Directors/Guarantors of the company has been
considered and it has been found as under :
RE : DIVERSION OF FUNDS :
28.1 The four entities mentioned are
related/associate companies and the transactions have
not been submitted by the company. There are no
justifiable reason for non-recovery of huge amount from
company's own related/associate companies. Merely
because the said debtors have suffered due to genuine
business loss overseas or due to adverse economic
conditions being the genuine reason for inaction namely
not initiating legal action was held to be reply not being
satisfactory.
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RE: ROUTING OF FUNDS :
28.2 The Review Committee has found that the
company had admitted maintaining accounts with the
banks outside consortium though it had admitted that as
per the sanctioned terms the company ought to have
routed all its transactions through consortium lenders
including the second respondent and no
permission/consent of consortium lenders had been
obtained for operating such accounts. In this background,
the justification made by the promoters/
directors/guarantors of the company that due to
classification of account as NPA by the consortium banks,
it had routed its business transactions with other banks
and continued the business operations as not being
satisfactory.
29. This Court while exercising the jurisdiction
under Article 226 of the Constitution of India could not be
in a position to act as an expert body, sitting in the
armchair of the financial experts as to what should have
been the business prudence cannot be the subject-matter
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of judicial scrutiny. We are of the considered view that
the conclusion reached by the experts particularly in the
field of finance and banking cannot be substituted with
our views. The interference in such matters, in writ
jurisdiction would not be called for unless it is
demonstrably perverse or illegal or contrary to admitted
facts. If the impugned decision is tested on the
touchstone of reasonable person examining the plea of
the debtor from the point of view of lender then such
decision arrived at by the Review Committee cannot be
substituted with the view of this Court. The reasons
assigned by the Promoters/Directors/Guarantors of the
company has been held to be as not satisfactory by the
second respondent, a member of the consortium of
lenders and said view cannot be substituted with the view
of this Court by examining the same on merits also would
not detain us for too long to brush aside the contention of
the learned Senior Counsel appearing for the petitioner.
Hence, point No.2 is answered in the negative or in
favour of the respondent.
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RE : POINT NO. 3 :
30. For the reasons aforestated, we proceed to pass
the following
ORDER
(i) Letters Patent Appeal Nos.596 of 2022 and 597 of 2022 are hereby dismissed.
(ii) The order dated 10.02.2022 passed in Special Civil Application No.2518 of 2022 is hereby affirmed subject to the observations made by us hereinabove insofar as the finding recorded at paragraph-27.
(iii) Civil Application Nos.1 of 2022 in both appeals stand dismissed as they do not survive for consideration.
(iv) Costs made easy.
(ARAVIND KUMAR, CJ) (ASHUTOSH J. SHASTRI, J) GAURAV J THAKER Page 39 of 39 Downloaded on : Tue Jan 03 20:48:41 IST 2023