Gujarat High Court
Mona Jignesh Acharya vs Bank Of India on 23 December, 2021
Author: J. B. Pardiwala
Bench: J.B.Pardiwala
C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/LETTERS PATENT APPEAL NO. 1043 of 2021
In
R/SPECIAL CIVIL APPLICATION NO. 9883 of 2021
With
CIVIL APPLICATION (FOR STAY) NO. 1 of 2021
In
R/LETTERS PATENT APPEAL NO. 1043 of 2021
With
R/LETTERS PATENT APPEAL NO. 1047 of 2021
In
SPECIAL CIVIL APPLICATION NO. 9508 of 2021
With
CIVIL APPLICATION (FOR STAY) NO. 1 of 2021
In
R/LETTERS PATENT APPEAL NO. 1047 of 2021
In
SPECIAL CIVIL APPLICATION NO. 9508 of 2021
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE J.B.PARDIWALA Sd/-
and
HONOURABLE MR. JUSTICE NIRAL R. MEHTA Sd/-
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1 Whether Reporters of Local Papers may be allowed Yes
to see the judgment ?
2 To be referred to the Reporter or not ? Yes
3 Whether their Lordships wish to see the fair copy No
of the judgment ?
4 Whether this case involves a substantial question No
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
==========================================================
MONA JIGNESH ACHARYA
Versus
BANK OF INDIA
==========================================================
Appearance:
SHIVAM D PARIKH(9477) for the Appellant(s) No. 1,2,3
Page 1 of 44
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C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021
SHIVANG P JANI(8285) for the Appellant(s) No. 1,2,3
KULDEEP K ADESARA(9222) for the Respondent(s) No. 1
MR KM PARIKH(575) for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE J.B.PARDIWALA
and
HONOURABLE MR. JUSTICE NIRAL R. MEHTA
Date : 23/12/2021
COMMON ORAL JUDGMENT
(PER : HONOURABLE MR. JUSTICE J.B.PARDIWALA)
1. Since the issues raised in both the captioned appeals are interrelated and the parties are also the same, those were taken up for hearing analogously and are being disposed of by this common judgment and order.
2. For the sake of convenience, the Letters Patent Appeal No.1047 of 2021 is treated as the lead matter.
3. This appeal under Clause 15 of the Letters Patent is at the instance of an unsuccessful writ applicant of a writ application and is directed against the judgment and order passed by a learned Single Judge of this Court dated 20.07.2021 in the Special Civil Application No.9508 of 2020, by which, the learned Single Judge declined to entertain the writ application and rejected the same.
4. The facts in brief giving rise to the present appeal may be summarized as under;
4.1 The appellant herein (original writ applicant) Page 2 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 preferred the Special Civil Application No.9508 of 2021, seeking the following reliefs;
"(a) Your Lordships may be pleased to call for the Forensic Audit Report dated 08.05.2017, Minutes of JLM meeting dated 21.01.2020 and other records and proceedings based on which account of M/s. Vimal Oil and Foods Limited is declared as fraud and after going through the same, to quash and set aside the action of Respondent Bank of declaring the action of M/s.Vimal Oil and Foods;
(b) Your Lordships may be pleased to quash and set aside all the consequent action taken by Respondent Bank against the Petitioner pursuant to classification of account of M/s. Vimal Oil and Foods Limited as fraud;
(c ) Pending hearing and final disposal of the petition, Your Lordships may be pleased to stay implementation and operation of action of Respondent Bank of declaring account of M/s. Vimal Oil and Foods Limited and all the consequential proceedings thereto;
(d) any other and further relief deemed just and proper be granted in the interest of justice;
(e) to provide for the cost of this petition."
4.2 It appears from the materials on record that the appellant herein is one of the Directors of a Company running in the name of M/s. Vimal Oil & Foods Limited. The said Company was incorporated in the year 1992. The company availed loan facilities over a period of time from the various financial institutions.
Page 3 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 4.3 The statutory auditor of the Respondent Bank, while conducting audit for the A.Y.2014-15, submitted a report dated 18.06.2015, wherein certain irregularities were alleged in the accounts of the Company. It was alleged that there were circuitous transactions in the bank accounts of the Company which raised suspicion about its genuineness and secondly it was alleged that the accomodative LC's were issued by the Company in the name of some parties which were discounted and returned to the Company.
4.4 It is the case of the appellant that without affording any opportunity of hearing, the Respondent-Bank conducted a special audit in the borrowing account of the Company through one M/s. R. R. & Co., Ahmedabad. The special auditor appointed by the Respondent Bank called for certain information from the Company which was duly furnished. Based upon which the special auditor submitted its report on 10.08.2015.
4.5 Based on the report of the special audit, the respondent-Bank declared the account of the Company as a non-performing asset on 30.09.2015.
4.6 On 13.01.2016, during the course of the 5 th Joint Lenders Meeting all the members of the consortium unanimously decided that the operations of the Company should not be classified as fraudulent based on mere observations made in the special audit report unless a Page 4 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 forensic audit is conducted. Even during the 8 th JLM held on 06.04.2016, all the lenders including the Respondent- Bank confirmed that neither the account of the Company was red flagged nor the Company was declared as a willful defaulter. Thereafter, on 05.07.2016, the account of the Company was red flagged by the respondent-Bank. Later, on 27.10.2016, the forensic auditor M/s. Satya Prakash Mangal & Co., New Delhi was appointed to carry out the forensic audit of the Company for the period between 01.04.2015 and 31.03.2016.
4.7 The forensic auditor M/s. Satya Prakash Mangal & Co., New Delhi submitted its report on 08.05.2017. It is the case of the appellant that although such report was not made available to him by the Bank, yet he came to know that the forensic audit report contained the following;
"(a) Routing of huge transaction by Company through other banks, high value credits and debits on the same day, major portion of purchases and sales through same parties / sister concerns /related parties.
(b) The Company maintained and operated around six bank accounts outside the consortium member banks.
(c ) The Company transacted sales with such parties which are not in activities of trading of edible oil and manufacturing."
4.8 On 24.08.2017, during the course of the 17 th JLM the Page 5 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 Forensic Audit report was discussed by the lenders at length and unanimously agreed with the findings of the forensic audit report in so far as it was concluded that there was no diversion of funds. The Deputy General Manager of the respondent-Bank also informed the lenders that the Bank had already submitted the memorandum to the HO for closure of the report and the red flagging in the account was to be lifted. The relevant extracts from the minutes of meeting are quoted herein below:-
"Forensic Audit report of the Company was also discussed in the JL Sh S. Rangarajan DGM, BOB discussed observations of the report which was further discussed among the lenders and finally it was agreed to go with the findings of forensic audit report. Sh. Srivastav, DGM, ALCB has advised the lenders that BOI has submitted the memorandum to HO for closure of the report. He has also advised that Red Flag in the account may be lifted after closure of the report and permission from HO."
4.9 It is the case of the appellant that the RBI (Fraud classification and reporting by commercial banks and select FIs) Direction, 2016 provides that based on the findings recorded in the forensic audit report, the lenders are required to classify the account as fraud within fifteen (15) days and within thirty (30) days of reporting the account as fraud the respondent-Bank was under an obligation to lodge a complaint with the CBI on behalf of the Bank. The relevant extracts of directions are as under;
Page 6 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 "8.9.5 The forensic audit must be completed within a maximum period of three months from the date of the JLF meeting authorizing the audit. Within 15 days of the completion of the forensic audit, the JLF shall reconvene and decide on the status of the account, either by consensus or the majority rule as specified above. In case the decision is to classify the account as a fraud, the RFA status shall be changed to Fraud in all banks and reported to RBI and on the CRILC platform within a week of the said decision. Besides, within 30 days of the RBI reporting, the bank commissioning/initiating the forensic audit should lodge a complaint with the CBI on behalf of all banks in the consortium/MBA. For this purpose, if the bank initiating the forensic audit is a private sector bank, the complaint shall be lodged with the CBI by the PSU bank with the largest exposure to the account in the consortium/MBA. If there is no PSU bank in the consortium/MBA or it is a solo bank lending by a private sector bank/foreign bank, the private bank/foreign bank shall report to the Police as per extant instructions. This would be in addition to the complaint already lodged by the first bank which had detected the fraud and informed the consortium/ MBA.
8.9.6 It may be noted that the overall time allowed for the entire exercise to be completed is six months from the date when the first member bank reported the account as RFA or fraud on the CRILC platform."
4.10 However, according to the appellant, the account of the Company was never declared as a fraud account and, in such circumstances, no complaint was lodged by the Bank with the CBI within the time stipulated by the RBI directions referred to above.
Page 7 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 4.11 According to the appellant, in view of the aforesaid, he did not deem fit to take any legal steps against the Bank for undertaking an illegal, arbitrary and highhanded forensic audit.
4.12 On 19.12.2017, the Adjudicating Authority admitted the Company Petition (I.B.) No.135 of 2017 filed against the Company under Section 7 of Insolvency and Bankruptcy Code, 2016 and initiated Corporate Insolvency Resolution process against the company. In such circumstances, the lenders appointed M/s. R.S. Patel & Co. for the forensic audit report of the Company for the period between 01.04.2016 and 19.12.2017. The forensic auditor submitted its report and same was discussed during the 5th CoC meeting dated 23.08.2018 and 6 th CoC meeting held on 29.08.2018. In the course of these meetings, the lenders who are part of the CoC concluded that no preferential, undervalued, fraudulent or extortionate transactions were traced. In view of such findings, the Resolution Professional thought fit not to file any application under Sections 43, 45, 49, 50 or 66 respectively of the Insolvency and Bankruptcy Code, 2016 during the entire Corporate Insolvency Resolution process that went on for two years. Thereafter, vide order dated 19.12.2019 passed in the M.A. No.17 of 2018 in the Company Petition (I.B.) No.135 of 2017, the Adjudicating Authority ordered for liquidation of the Company.
Page 8 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 4.13 It appears that the Bank addressed a letter dated 21.05.2021 to the CBI to take appropriate action against the Company and the appellant herein as one of the Directors of the Company for the alleged fraud.
4.14 On the strength of the letter of the Bank dated 21.05.2021, referred to above, a first information report came to be lodged by the appellant herein for the offences punishable under Section 120B read with Section 420 of the Indian Penal Code and Section 13(2) read with Section 13(10(d) of the Prevention of Corruption Act.
4.15 As the account of the company came to be classified as a fraud account, the appellant came before this Court by filing the Special Civil Application No.9508 of 2021.
4.16 The learned Single Judge declined to entertain the writ application essentially on two grounds; (i) that the appellant was trying to scuttle the investigation undertaken by the CBI for the alleged offences referred to above and (ii) the Bank was not obliged in law to give any opportunity of hearing to the appellant before classifying the account as a fraud account.
4.17 We quote the relevant observations of the learned Single Judge as contained in the impugned order;
Page 9 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 "4. Having considered the submissions made on behalf of the petitioner, it appears that the petitioner has sought the relief for quashing and setting aside the action of the respondent-bank for filing the complaint before the CBI but the respondent-bank in the complaint made on 21 st May, 2021 filed before the CBI has narrated in detail as to how the Company and its Directors have committed offences punishable under Section 420 of the Indian Penal Code to the tune of Rs.678.93 Crores as under:
"12. After the account turned NPA, in line with RBI guidelines, Staff accountability aspect was examined by competent authority and was closed on 13.05.2016. Subsequent to declaration of fraud, fresh vigilance investigation is being carried out, in case investigation reveals accountability of any staff, action will be initiated as per rules, However, the involvement of unknown public servant in the fraud committed by the said company may be investigated by CBI.
13. 'Mandate for filing FIR from consortium member Banks:
Subsequent to classification of account under FRAUD category by Fraud ' Monitoring Group on 21.02.2018, Joint Lenders Meeting (JLM) was called on 21.01.2020. The meeting was attended by nine member Banks/ARCs which was held for seeking mandates from member banks to enable Bank of India to file joint FIR with CBI in terms of OM no 25016/10/2017 dated 12.10.2018 issued by Ministry of Home Affairs, (Foreigner's Division), Govt. of India.
In the meeting, all member Banks present have confirmed that they are having original sanctioned proposals and Lead bank is having security documents of consortium arrangement and the said proposals and documents are in safe custody of PNB investment services Ltd., 8th Floor, Gujarat Bhavan, Opp. MJ. , Library, Ellisbridge, Anmedabad380006.
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14. As detailed in paras 7 to10 above, the said borrower company, its directors, unknown public servants and others, with dishonest intention of causing wrongful loss fo lending Banks for wrongful gain to themselves, 'have fraudulently committed the act of cheating (Section 420 of IPC) with consortium if banks during the period 2014 to 2017 and thereby causing loss of Rs. 678.93 crores to the consortium banks. A thorough investigation by your office would 'detect the complete details about the aforesaid circuitous transactions and the criminal conspiracy therein. The roles of Chartered Accountants, Statutory Auditors, Stock Auditors, and Empanelled Valuers etc. may also be looked into.
15. In view of the above facts, we request you to register Bank's complaint as a regular case, and investigate into the matter to book the aforementioned M/s VOFL, its said directors, unknown public servants and others for the offence committed by them, by initiating appropriate criminal proceedings against them in accordance with law. A copy of the FIR may please be furnished to us."
5. In view of the facts which are not in dispute, after classification of the account of fraud category by fraud monitoring group of the Bank on 21.02.2018, Joint Lenders Meeting was called on 21.01.2020. The meeting was attended by nine members of Bank/ARCs which was held seeking mandates from member banks to enable Bank of India to file joint FIR with CBI in terms of OM dated 12.10.2018 issued by Ministry of Home Affairs (Foreigner's Division), Government of India and accordingly, the complaint was filed for cheating the consortium banks during the period from 2014 to 2017 against the Company and its Directors.
6. In view of the above facts, it appears that the petitioner by filing this petition has tried to intervene in the investigation which is to be carried out by the CBI pursuant to the FIR filed on 30th May, 2021.
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7. The respondent-Bank of India who is a lead bank has narrated the fraudulent action of the Company in paragraph No.7 to 10 of the letter dated 21.05.2021. The endeavor on part of the learned Senior Advocate for the petitioner to submit that the respondent-Bank has not complied with the principles of natural justice cannot be looked into at this stage more particularly, when the respondent-bank after considering the three audit reports have filed the complaint and therefore it is for the investigating agency to come to the conclusion that whether further action is required to be taken in the matter or not.
8. Reliance placed by the learned Senior Advocate on the decisions rendered by the High Court of Telangana in case of Rajesh Agarwal (Supra) which is already stayed by the Supreme Court as well as the decision of the Bombay High Court in case of Surana Developers (Supra) and the decision of Delhi High Court in case of Hem Singh Bharana (Supra) are not applicable in the facts of the case when the complaint is already lodged and investigation is being continued by the CBI. The alleged noncompliance of principle of natural justice cannot be invoked at this stage as the action is already culminated in the FIR on the basis of the complaint made by the respondent-Bank. It is also not in dispute that the petitioner was aware about the declaration of the account as fraud in year 2018 when the forensic auditor was appointed by the respondent-bank and pursuant to the report of the forensic audit, the Joint Lender's Meetings were convened wherein, the petitioner was very much present in all the meetings and therefore, the petitioner cannot say that there is violation of principles of natural justice.
9. In view of above facts, petitioner is not entitled to the relief as prayed for in this petition. The petition therefore fails being devoid of any merit and is accordingly dismissed. No order as to costs. "
Page 12 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 4.18 Being dissatisfied with the impugned judgment and order passed by the learned Single Judge, the appellant (original writ applicant) is here before this Court with the present appeal.
Submissions on behalf of the appellant:-
5. Mr. S.N. Soparkar, Mr. P.K. Jani and Mr. Navin Pahwa, the learned senior counsel appearing for the appellants in both the appeals vehemently submitted that the learned Single Judge committed a serious error in rejecting the writ application. The principle argument of all the three learned senior counsel is that this litigation has nothing to do with the criminal prosecution instituted by the CBI against the Company and its Directors for the alleged offences. The reason why the writ application had to be filed is that no opportunity of hearing was given to any of the Directors of the Company before taking the decision to declare the account as a fraud account. It has been vehemently submitted that such action on the part of the Bank entails severe civil consequences and, in such circumstances, it was expected of the Bank to at least issue a notice calling upon the Company and its Directors to show-cause as to why the account should not be declared as a fraudulent account or a fraud account.
According to the learned senior counsel, if such notice would have been issued, then an appropriate reply could Page 13 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 have been filed pointing out that no illegalities or irregularities as alleged had been committed in any manner.
6. The second argument canvassed on behalf of the appellant is that all the Directors came to know about such action only in 2021. It is pointed out that on 05.07.2016, the account was red flagged. On 21.08.2018, the account came to be declared as a fraud account. On 01.06.2021, the CBI raided the premises of the Company and the residential premises of the Directors and on 30.05.2021, the first information report came to be lodged. It was further pointed out that the entire Board of Directors came to be suspended with effect from 19.12.2017.
7. Our attention was drawn to Page-76 of the paper- book. At Page-76 of the paper-book, the Clause 8.12 which provides for the penal measures for fraudulent borrowers, has been annexed. The same reads thus;
"8.12 Penal Measures for fraudulent borrowers:-
8.12.1 in general 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. In particular, borrowers who have defaulted and have also committed a fraud in the account would be debarred from availing Page 14 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 bank finance 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. After this period, it is for individual institutions to take a call on whether to lend to such a borrower. The penal provisions would apply to non-whole time directors (like nominee directors and independent directors) only in rarest of cases based on conclusive proof of their company.
8.12.2 No restructuring or grant of additional facilities may be made in the case of RFA or fraud accounts. However, in cases of fraud/malfeasance where the existing promoters are replaced by new promoters and the borrower company is totally delinked from such erstwhile promoters/management, banks and JLF may take a view on restructuring of such accounts based on their viability, without prejudice to the continuance of criminal action against the erstwhile promoters/management.
8.12.3 No compromise settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued.
8.12.4 In addition to above borrower- fraudsters, third parties such as builders, warehouse/cold storage owners, motor vehicle/tractor dealers, travel agents etc. and professional such as architects, valuers, chartered accountants, advocates etc are also to be held accountable if they have played a vital role in credit sanction/disbursement or facilitated the preparation of frauds Banks are advised to report to Indian Banks Association (IBA) the details of such third parties invovled in frauds.
8.12.5 Before reporting to IBA, banks have to satisfy themselves of the involvement of third parties concerned and also provide them with an opportunity Page 15 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 of being heard. In this regard, the banks should follow normal procedures and the processes followed should be suitably recorded. On the basis of such information, IBA would, in turn, prepare caution lists of such third parties for circulation among the banks."
8. According to the learned senior counsel, the above referred penal measures would entail into serious civil consequences and having regard to those, an opportunity of hearing should have been given by the Bank to the Company as well as to its Directors.
9. In such circumstances, referred to above, it is prayed that the impugned order passed by the learned Single Judge be set aside and the action of the Bank in classifying the account as a fraud account be condemned and set at naught on the ground that no opportunity of hearing was given to the Directors of the Company.
Submissions on behalf of the Bank:-
10. Mr. K. M. Parikh, the learned counsel appearing for the Bank, on the other hand, has vehemently opposed both the appeals. He straightway invited the attention of this Court to the averments made in the affidavit-in-reply filed on behalf of the Bank. The same reads thus;
"2. I humbly submit that Respondent Bank on 21/02/2018 identified & reported the account of M/s. Vimal Oil & Foods Limited as fraud on the basis of the Page 16 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 Forensic Audit Report conducted in the Month of May, 2017.
3. I humbly submit that Respondent Bank has taken decision of appointment of Forensic Auditor for conducting Forensic Audit of the Company in its 12 th JLM meeting. The Copy of the 12 th JLM meeting is annexed by the Appellant in present Appeal as Annexure-F at Page No. 50 of present Letters Patent Appeal.
4. I humbly submit that the account of M/s. Vimal Oil & Foods Limited was classified and identified as Fraud by the Respondent Bank on 21/02/2018. However, Appellant has challenged the classification & identification of the account of M/s. Vimal Oil & Foods Limited as fraud by filing Special Civil Application No. 9883/2021 on 09/07/2021 i.e. after complaint was filed by the Respondent Bank dated 30/05/2021 under section 154 of Criminal Procedure Code against M/s. Vimal Oil & Foods Limited. The Copy of the said First Information Report dated 30/05/2021 is annexed as Annexure-N at Page No. 140 to the present Letters Patent Appeal filed by the Appellant.
5. I humbly submit that from the above facts and circumstances of the case it can be clearly construed that Appellant has not challenged the actions of Respondent Bank taken in the year 2018 of classification and identification of the account of M/s. Vimal Oil & Foods Limited as fraud before 09/07/2021 i.e. date of filing Special Civil Application No. 9883/2021. Henceforth, only after Respondent Bank has filed a complaint against M/s. Vimal Oil & Foods Limited on 30/05/2021, Appellant has challenged the actions of the Respondent Bank. It is submitted that since last three years Appellant have kept complete silence on the decision of the Respondent Bank of identifying the account of M/s. Vimal Oil & Foods Limited as fraud. Henceforth, by way of filing Special Civil Application No. 9883/2021 and subsequently Page 17 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 filing present Letters Patent Appeal, Appellant in a way is seeking intervention in the investigation carried out by Central Bureau of Investigation.
6. I humbly submit that Respondent Bank has identified the account of the M/s. Vimal Oil & Foods Limited as Fraud on the basis of the Forensic Audit Report dated 08/05/2017. According to the RBI guidelines no notice is required to be issued to the Company or its Directors for appointment of Forensic Auditor or declaration or identification of the account of the M/s. Vimal Oil & Foods Limited as Fraud.
7. I humbly submit that in view of the above it can be clearly construed that Appellant was very well in the knowledge of the classification and identification of the account of M/s. Vimal Oil & Foods Limited as fraud and henceforth the contentions of the Appellant of violation of Principles of natural justice is invalid and the same is not tenable in the eyes of law. The Appellant remained silent for three years after the classification of the account of M/s. Vimal Oil & Foods Limited as fraud and only challenge the said actions after filing of FIR by the Respondent Bank which clearly construes that Appellant has filed present Letters Patent Appeal with an intention to intervene in the investigation of the Central Bureau of Investigation.
8. I humbly submit that Appellant cannot challenge the aspect of non-compliance of principles of natural justice at this stage when Respondent Bank has already filed an FIR in respect of the fraud committed by M/s. Vimal Oil & Foods Limited and further the same is investigated by Central Bureau of Investigation.
9. I humbly submit that Ld. Single Judge while disposing of Special Civil Application No. 9883/2021 has considered the above aspect and given detailed finding of the same in Para No. 7 & 8 of the impugned order dated 20/09/2021 passed in Special Page 18 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 Civil Application No. 9883/2021 which reads as under:
"7.The respondent-Bank of India who is a lead bank has narrated the fraudulent action of the Company in paragraph No.7 to 10 of the letter dated 21.05.2021. The endeavor on part of the learned Senior Advocate for the petitioners to submit that the respondent-Bank has not complied with the principles of natural justice cannot be looked into at this stage more particularly, when the respondent-bank after considering the three audit reports have filed the complaint and therefore it is for the investigating agency to come to the conclusion that whether further action is required to be taken in the matter or not.
8. Reliance placed by the learned Senior Advocate on the decisions rendered by the High Court of Telangana in case of Rajesh Agarwal (Supra) which is already stayed by the Supreme Court as well as the decision of the Bombay High Court in case of Surana Developers (Supra) and the decision of Delhi High Court in case of Hem Singh Bharana (Supra) are not applicable in the facts of the case when the complaint is already lodged and investigation is being continued by the CBI. The alleged non-
compliance of principle of natural justice cannot be invoked at this stage as the action is already culminated in the FIR on the basis of the complaint made by the respondent-Bank. It is also not in dispute that the petitioners were aware about the declaration of the account as fraud in year 2018 when the forensic auditor was appointed by the respondent bank and pursuant to the report of the forensic audit, the Joint Lender's Meetings were convened and therefore, the petitioners cannot say that there is violation of principles of natural justice.
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10. I humbly submit that on the basis of the above stated facts and circumstances of the case and legal contentions raised by the Respondent bank in present Affidavit-in-reply, present appeal filed by the appellant is devoid of any merits and deserves to dismiss summarily. The appellant is not entitled to obtain any reliefs as prayed for in Para-9 of present Letters Patent Appeal.'
11. In such circumstances, referred to above, Mr. Parikh prays that there being no merit in the two appeals, those may be dismissed.
ANALYSIS
12. Having heard the learned counsel appearing for the parties and having gone through the materials on record, the only question that falls for our consideration is whether the Bank should have given an opportunity of hearing to the Directors of the Company before declaring or classifying the account of the Company as a fraud account.
13. We do not intend to go into any other issues except the issue as regards the principles of natural justice. We are conscious of the fact that any indulgence if granted by this Court at this point of time to the appellant may have its own impact on the investigation which has been undertaken by the CBI for the alleged offences pursuant to the FIR lodged by the Bank. We must be very conscious about this aspect of the matter.
Page 20 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 Principles of natural justice:-
14. The rules of natural justice are not rigid rules, they are flexible and their application depends upon the setting and the background of the statutory provision, nature of the right, which may be affected and the consequences which may entail, its application depends upon the facts and circumstances of each case. [AIR 1987 SC 593, para 25 (R.S. Dass v. Union of India)]
15. As observed by the Supreme Court in Suresh Koshi George v. University of Kerala, Civil Appeal No. 990 of 1968, decided on 15.7.1968, the rules of natural justice are not embodied rules. What particular rule of natural justice should apply to a given case must depend to a great extent on the facts and circumstances of that case, the framework of the law under which the inquiry is held and the constitution of the tribunal or body of persons appointed for that purpose. If the aim of the rules of natural justice is to secure justice or to put it negatively to prevent miscarriage of justice whenever a complaint is made before a court that some principle of natural justice had been contravened the court has to decide whether the observance of that rule was necessary for a just decision in the facts of that case. [AIR 1970 SC 150, para 20 (A.K. Kraipak v. Union of India)] Page 21 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021
16. The question whether the requirements of natural justice have been met by the procedure adopted in a given case must depend to a great extent to the facts and circumstances of the case in point, the constitution of the Tribunal and the rules under which in functions. [AIR 1969 SC 198, para 7 (Suresh Koshi v. University of Kerala)]
17. The soul of audi alteram partem rule is fair-play in action. Its essence is good conscience in a given situation:
nothing more but nothing less-[AIR 1978 SC 851 (Mohinder Singh Gill v. Chief Election Commissioner)].
"Fairness itself is flexible, pragmatic and relative concept, not a rigid ritualistic or sophisticated abstraction"- the Supreme Court observed in this case, and also added that there was no ground to be frightened of delay, inconvenience and expense, if natural justice gained access.
18. Whatever standard of Natural Justice is adopted, one essential is that the person concerned has a reasonable opportunity of presenting his case. "Lord Denning expressed the paramount policy consideration behind this rule of public law (while dealing with the nemo judex aspect) with expressiveness. "Justice must be rooted in confidence; and confidence is destroyed when right minded-people go away thinking 'the judge was biased'." We may adopt it to the audi alteram situation: "justice must be felt to be just by the community if democratic Page 22 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 legality is to animate the rule of law. And if the invisible audience sees a man's case disposed of unheard, a chorous of 'no-confidence' will be heard to say,' that man had no chance to defend his stance'," That is why Tucker L.J. in Russal v. Duke of Norfolk, (1949) 1 All. ER 109, 118, emphasized that 'whatever standard of natural justice is adopted, one essential is that the person concerned should have a reasonable opportunity of presenting his case'. What is reasonable in given circumstances is in the domain of practicability; not formalised rigidity." Para 56, Mohinder Singh Gill (supra).
19. The right to be heard does not necessarily include a personal hearing. In the absence of any prescription in the statute itself, it may be sufficient in a particular case to consider the written representation. [AIR 1966 SC 671 (M. P. Industries Ltd. v. Union of India)]
20. The situation in which the 'audi alteram partem' rule may be excluded has been observed in AIR 1985 SC 1416 (Union of India v. Tulsiram Patel) that not only, therefore, can the principles of natural justice be modified but in exceptional cases they can even be excluded. There are well defined exceptions to the nemo judex in causa sua rule as also to the audi alteram partem rule. The nemo judex in causa sua rule is subject to the doctrine of necessity and yields to it as pointed out by the Supreme Court in J. Mohapatra & Co. v. State of Orissa, (1985) 1 Page 23 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 SCR 322, 334-5. So far as the audi alteram partem rule is concerned, it is well established that where a right to a prior notice and an opportunity to be heard before an order is passed would obstruct the taking of prompt action, such a right can be excluded where the nature of action to be taken, its object and purpose and the scheme of the relevant statutory provisions warrant its exclusion; nor can the audi alteram partem rule be invoked if importing it would have the effect of paralysing the administrative process or where the need for promptitude or the urgency of taking action so demands, as pointed out in Maneka Gandhi (supra) at page 681. If the legislation and the necessities of a situation can exclude the principles of natural justice including the audi alteram partem rule a fortiorari so can a provision of the Constitution, for a Constitutional provision has a far greater and all-pervading sanctity than a statutory provision, (para 101)
21. The Supreme Court in the case of State Bank of India vs. Jah Developers Pvt. Ltd & Ors., reported in (2019) 6 SCC 787, was called upon to answer the following question;
"The question that arises in the present appeals is whether, when a person is declared to be a willful defaulter under the Circulars of the Reserve Bank of India ["RBI"], such person is entitled to be represented by a lawyer of its choice before such declaration is made."Page 24 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022
C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021
22. Before proceeding to answer the aforesaid question, the Supreme Court looked into the RBI Circular dated 01.07.2013 described as a Master Circular on willful defaulters. While deciding whether a willful defaulter is entitled to be represented by a lawyer of its choice, the Supreme Court touched the question whether an oral hearing is contemplated under the revised circular dated 01.07.2015. We quote the relevant observations;
"13. The next question that arises is whether an oral hearing is required under the Revised Circular dated 01.07.2015. 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. Govt. (NCT of Delhi) and Ors., (2014) 9 SCC 105, this Court has held, in a blacklisting case, that where 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 paragraph 20].
14. When it comes to whether the borrower can, Page 25 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 given the consequences of being declared a willful 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 and Anr. v. Chief Election Commissioner, New Delhi and Ors., (1978) 1 SCC 405, in the context of election law, this Court held:
"63. In Wiseman v. Borneman [(1967) 3 All ER 1945] 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 pressure of circumstances. To burke it altogether may not be a stroke of fairness except in very exceptional circumstances. Even in Wiseman 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 [(1974) 3 WLR 660] summarised the observations of the Law Lords in this form). No doctrinaire approach is desirable but the Court must be Page 26 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 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 concerned parties summoned at an hour's notice, or in a crisis, even a telephone call, may suffice. ......" (emphasis in original)
15. In Kavita v. State of Maharashtra and Ors. (I), (1981) 3 SCC 558 ["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 and Anr., (1981) 4 SCC 327, 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 (supra). It was finally held Page 27 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 that since 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.
16. In J.K. Aggarwal v. Haryana Seeds Development Corporation Ltd. and Ors., (1991) 2 SCC 283, this Court, after discussing the case law, held in paragraph 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 paragraph 8].
17. In Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115, 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:
"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 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) Kalindi (N) v. Tata Locomotive & Engineering Co. Ltd., Jamshedpur [(1960) 3 SCR 407 : AIR 1960 SC 914], (ii) Brooke Bond India (P) Ltd. v. Subba Raman (S.) [(1961) 2 LLJ 417] and (iii) Dunlop Rubber Co. v.Page 28 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022
C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 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."
xxx xxx xxx
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 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 dispatch 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."
18. In D.G., Railway Protection Force and Ors. v. K. Raghuram Babu, (2008) 4 SCC 406, this Court, in the context of a domestic/departmental enquiry held:
Page 29 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 "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 and Engg. Co. Ltd. [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 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. Subba Raman [(1961) 2 LLJ 417 (SC)].
10. Similarly, in 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 [(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 or be allowed to Page 30 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 cross-examine witnesses.
19. 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, (1974) 4 SCC 374, this Court held:
"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 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 Page 31 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 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."
20. Also, in National Seeds Corporation Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645, this Court laid down:
"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 Kalindi v. Tata Locomotive & Engg. Co. Ltd. [(1960) 3 SCR 407 : AIR 1960 SC 914], Dunlop Rubber Co. v. Workmen [(1965) 2 SCR 139 : AIR 1965 SC 1392], 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. [(2001) 9 SCC 540 : 2002 SCC (L&S) 1043]."
The Court then held:
"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 Page 32 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 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 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 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."
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 willful 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 Page 33 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 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 willful 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 willful defaulter, and a promoter/director of a willful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29A of the Insolvency and Bankruptcy Code, 2016, a willful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that paragraph 3 of the Master Circular dated 01.07.2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following paragraph 3(b) of the Revised Circular dated 01.07.2015, must give its order to the borrower as soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 01.07.2013 Page 34 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 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."
23. Thus, what weighed with the Supreme Court in State Bank of India (supra) was the fact that the moment a person is declared to be a willful defaulter, the impact on its fundamental right to carry on business as enshrined under Clause 19(1)(g) of the Constitution would be direct and immediate. The Supreme Court noticed that in such a scenario, no additional facilities would be granted by any Bank/Financial Institutions and entrepreneurs/promoters would be barred from institutional finance for five years. The other consequences as contained in Para-8.12 of the circular, referred to above, would be that the fraudulent borrowers would be debarred from availing the bank finance from any Scheduled Commercial Banks, Development Financial Institutions, Investment Institutions, etc. for a period of five years from the date of full payment of the defrauded amount.
24. The Supreme Court permitted the borrower in the aforesaid case to file a representation and directed the Review Committee to look into the same and pass a reasoned order.
Page 35 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021
25. Our attention was also drawn to a decision of the Telangana High Court in the case of Rajesh Agarwal vs. Reserve Bank of India & Ors., reported in 2021 (2) ALD 290, wherein a Division Bench of the said High Court dealing with almost an identical situation like the one on hand, read the principles of natural justice into such type of action of the Bank and proceeded to observe as under;
"59. Ironically, the 'right to be heard' has been given to third parties, such as builders, warehouse/cold storage owners, motor vehicle/ tractor dealers, travel agents, etc. and professionals such as architects, valuers, chartered accountants, advocates, etc., if they have played a vital role in sanction/disbursement, or facilitated for preparation of fraud. Hence, while those who are allegedly the peripheral accomplices are granted an opportunity of hearing, the main actor is denied the right to speak and to defend his position. Considering the grave civil consequences and penal action, which would be followed as a result of classifying a borrower as 'a fraudulent borrower', or 'a holder of a fraudulent account', it is imperative that principles of natural justice must be read into Clauses 8.9.4 and 89.9.5 of the Master Circular.
60. Fair play in governance is the gravitational force which binds the entire State. Therefore, before a person or entity is obliterated, or is subjected to civil and penal consequences, the person or entity must be given an opportunity of hearing. Without giving an opportunity of hearing, without giving an opportunity to explain the intricacies of the accounts, or of the business dealings, to denounce a person is to act unfairly, unjustly, unreasonably, and arbitrarily. Even in an administrative action, justice should not only be done, but also must appear to be done to the satisfaction of all the parties. Therefore, the Page 36 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 principles of audi alteram partem, howsoever short, have to be applied before declaring a party as 'a fraudulent borrower', or as 'a holder of fraudulent account'. Such an interpretation is also inconsonance with the principles extracted above from the relevant case law. Thus, this Court is of the opinion that the principles of audi alteram partem will have to be incorporated into Clauses 8.9.4 and 8.9.5 of the Master Circular even if the said Clauses are silent. Such an interpretation cannot be said to be farfetched. For, as mentioned above, in a series of cases decided by the Apex Court, the Hon'ble Supreme Court has read the requirements audi alteram partem even in those provisions of law which did not expressly prescribed the observance of audi alteram partem in their scope and ambit.
61. According to Mr. B. Nalin, the learned Standing Counsel for the RBI, lodging of a complaint is similar to registration of an FIR. Therefore, the need to hear the alleged accused prior to initiating the criminal investigation cannot be read into the Master Circular. In our view, the said argument is highly misplaced. For, the first step is for the JLF to form an opinion whether the borrower is 'a fraudulent borrower' or not, or whether the account is 'a fraud' or not? It is only after formulating the said opinion, that the JLF is required to lodge a complaint with the criminal investigating agency. Moreover, since the very formation of an opinion would instantaneously trigger off civil and penal consequences, the formation of an opinion cannot be equated with the lodging of an FIR. Therefore, the contention raised by Mr. B. Nalin, is clearly unacceptable.
62. Coming to the factual aspects of the case, Mr. Mukul Rohatgi, the learned Senior Counsel, has pleaded that prior to the meeting of the JLF dated 15.02.2019, the Company was invited to all the earlier meetings of the JLF. Yet, while taking the most crucial decision, the Company has been kept at bay. This assertion of the petitioner has not been denied Page 37 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 by the respondents. Hence, the assertion is taken to be true. Since the Company was invited and participated on the earlier occasion, then the Company cannot be denied the opportunity of hearing on the spacious plea that Clauses 8.9.4 and 8.9.5 of the Master Circular do not envisage the giving of opportunity of hearing to the defaulting party. To raise such a plea is to approbate and reprobate simultaneously. Hence, the denial of opportunity of hearing to the petitioner or to the Company is legally unsustainable.
63. A bare perusal of the decision taken by the JLF in its meeting on 15.02.2019, and the resolution by the FIC on 31.07.2019 clearly reveal that the JLF and the FIC have relied upon the Report of the Forensic Auditor, dated 06.04.2018. Moreover, FIC has relied upon the Report submitted by Dr. K.V. Srinivas, IRP, for concluding that the account of the borrowing Company should be declared as 'fraud'. According to Mukul Rohatgi, copies of these reports were never furnished, either to the borrower Company, or to its Directors such as the petitioner. It is, indeed, trite to state that a party must be informed about the evidence which is likely to be used against it. For, a chance to meet out the evidence, to challenge the same has to be given to the party. However, even this rudimentary principle has been ignored by the JLF. Thus, the decision dated 15.02.2019 of the JLF is legally unsustainable.
64. Mr. B.S. Prasad, the learned Senior Counsel, has of course argued that the IDBI Bank in its letter, dated 21.04.2018, had furnished a copy of the Forensic Auditor's Report. However, the said contention is belied by the record. For, in its letter dated 21.04.2018 the IDBI Bank had merely extracted and paraphrased the finding of the Forensic Auditor Report. But the complete copy of the Forensic Auditor Report was never submitted along with the said letter. Hence, the Company was denied the opportunity to explain the finding of the Page 38 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 Report, and the opportunity to challenge the findings of the Report.
65. Moreover, the Report submitted by Dr. K.V. Srinivas, IRP, relied on by the FIC was never brought to the notice of, either the borrower Company, or to its Directors. Thus, neither the borrower Company, nor the petitioner had any information, or knowledge about a report which was going to be read against them. It is, indeed, trite to state that a piece of evidence which would be read against a party must necessarily be brought to the notice of the party. For, a full opportunity needs to be given to the concerned party to explain, or to challenge the evidence being read against him/it. However, this crucial step which is part of audi alteram partem is conspicuously missing in the present case.
66. A bare perusal of the order, dated 15.02.2019, clearly reveals that, according to Item No. 2, having considered the Report of the Forensic Auditor, and on perusal of the clarification / information submitted by the Company to the Forensic Auditor, the JLF had agreed to 'close the observation'. Similarly, in Item No. 4, the Auditor's Report, with regard to the Fund Flow Statement, the JLF had decided to 'close the observation'. Likewise, according to Item No. 5, dealing with payment of advances to M/s. Rohit Iron and Steel (I) Pvt. Ltd., the JLF had considered the Forensic Auditor's Report and agreed to "close the observations". Thus, the observations were closed not only on the basis of the Forensic Auditor's Report, but also on the basis of clarification / information submitted by the Company to the Forensic Auditor. Yet, the same opportunity to explain to the JLF was not given to the Company, or to the petitioner. Hence, the decision of the JLF dated 15.02.2019 is legally invalid.
67. Moreover, according to Item No. 1, further clarification was sought from the Forensic Auditor. Similarly, according to Item No. 3, a further Page 39 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 clarification was sought from the Forensic Auditor. Likewise, according to Item No. 8, further clarification was to be obtained from Forensic Auditor. Yet, the JLF did not wait for further clarification from the Forensic Auditor. Instead, instantaneously the JLF, in its meeting, unanimously decided that "the account be treated as fraud". Interestingly, according to Item Nos. 1, 3 and 8, the JLF had also decided that "in case no clarification is received from the Forensic Auditor, only then it will treat the account as fraud".
Yet, curiously, it had not waited to receive further clarification from the Forensic Auditor, but has jumped to the conclusion that "the account be treated as fraud". Hence, the JLF has drawn conclusion in absence of the relevant evidence. Therefore, the conclusion is legally unsustainable.
68. The final conclusion of the JLF reads as under:-
"Hence, it was unanimously decided that the account be treated as fraud for the above reasons".
(Emphasis added) Once the JLF was of the opinion that further clarification is required from the Forensic Auditor, once it is in the process of taking a decision, once it has decided to wait till further clarification is submitted, the JLF is not justified in concluding that "the account be treated as fraud". In fact, the JLF was legally required to wait for further clarification, or non- clarification from the Forensic Auditor. But till it had heard from the Forensic Auditor, one way or the other, it could not have jumped the gun. Moreover, the JLF is unjustified in claiming that 'the account is treated as fraud for the above reasons". After all, the reasons themselves are incomplete and inchoate as the JLF had already opined that 'further clarification from the Forensic Auditor should be called for'. Therefore, the use of the words "for the above reasons", are merely the use of a legalistic language without any substantive content. Hence, the final conclusion of the JLF has the veneer of a legal reasoning, but is deprived of legal content.
Page 40 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 Therefore, the decision of the JLF is legally unsustainable.
69. A bare perusal of the resolution of FIC, dated 31.07.2019, also reveals that the said resolution is based on the Report submitted by Dr. K.V. Srinivas, IRP. However, there is no evidence available on record to establish the fact that a copy of the said Report was furnished to the borrower Company, or to the petitioner. Thus, neither the borrower Company, nor the petitioner, nor any other Director was given a chance to explain, or to challenge the finding of the said Report. A copy of the said Report has not been placed even before this Court by the respondents. Therefore, the decision taken by FIC is again based on a piece of evidence, which was never brought to the notice of the borrower Company, or to the notice of the petitioner. Therefore, a vital requirement of audi alteram partem is conspicuously missing. Therefore, the resolution of the FIC, dated 31.07.2019 is legally unsustainable.
70. For the reasons stated above, this Writ Petition is, hereby, allowed with the following directions and in the following terms:-
70.1. Firstly, the principle of audi alteram partem, part of the principles of natural justice, is to be read in Clause 8.9.4 and 8.9.5 of the Master Circular.
70.2. Secondly, the decision, dated 15.02.2019, passed by the JLF, and the resolution dated 31.07.2019, passed by the FIC are, hereby, set aside.
70.3. Thirdly, the JLF is directed to give an opportunity of hearing by furnishing copies of both the Reports, namely the Forensic Auditor Report, dated 06.04.2018 and the subsequent Report submitted by Dr. K.V. Srinivas, IRP, to the petitioner, and to the OL.
70.4. Fourthly, the JLF is directed to give an Page 41 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 opportunity of personal hearing both to the petitioner and to the OL before taking any decision on the issue whether the account should be classified as 'fraud' or not?
70.5. Fifthly, after the JLF has taken its decision, the FIC is directed to pass its resolution whether the decision of the JLF should be confirmed or not?
70.6. Lastly, the said exercise shall be carried out by the JLF within a period of three months from the date of receipt of the certified copy of this judgment.
Furthermore, the subsequent exercise by FIC shall be carried out within two months from the date of the decision of the JLF."
26. However, it was brought to our notice that the above decision of the Telangana High Court is now a subject matter of challenge before the Supreme Court and the Supreme Court passed the following order dated 15.04.2021;
"Applications seeking exemption from filing certified copy of the impugned order are allowed.
Issue notice.
Dasti service, in addition, is permitted.
Learned counsel is permitted to file counter affidavit within a period of four weeks from today. Rejoinder affidavit within two weeks thereafter.
Set down for hearing on Tuesday, the 13 th July, 2021 on top of the Board.
Meanwhile, the Minutes/ Order dated 15.02.2019 passed by the Joint Lenders Meeting is not to be Page 42 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 acted upon. The High Court insofar as it observed that a personal hearing be given is stayed."
27. One more aspect which weighed with the learned Single Judge while declining to grant any relief is delay on the part of the appellant in coming to this Court. According to the learned Single Judge, the amount was classified as a fraud account way back in the year 2018 and, in such circumstances, there was no good reason for the learned Single Judge to entertain a writ application after a period of almost three years. However, there are averments in the memorandum of the writ application that the writ applicants came to know about such action only in the year 2021 and such averments have not been refuted in any manner by the Bank in its affidavit-in-reply.
28. In the overall view of the matter, we have reached to the conclusion that we should not, at this stage, straightway condemn the action of the Bank in classifying the account as a fraud account on the ground that no opportunity of hearing was given to the Bank. However, at the same time, we are inclined to give an opportunity to the appellants to file a detailed representation pointing out all the relevant aspects of the matter to the Bank. The Bank is expected to look into such representation meaningfully and decide the same in accordance with law.
29. In view of the aforesaid, we propose to modify the order passed by the learned Single Judge to the extent that it shall be open to the appellants being the Directors Page 43 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022 C/LPA/1043/2021 JUDGMENT DATED: 23/12/2021 of the Company to file a detailed representation addressed to the competent authority of the Bank within a period of three weeks from today and upon receipt of such representation, the same may be considered by the appropriate authority or committee of the Bank and take an appropriate decision on the same by passing an appropriate order. The order shall be communicated to the appellants. This, in our view, would be in tune with what the Supreme Court did in the case of State Bank of India vs. Jah Developers Pvt. Ltd. (supra).
30. We clarify that this order shall not come in the way of the CBI in any manner in continuing with the investigation of the alleged offences pursuant to the FIR lodged by the Bank. The appellants also shall not take any undue advantage of this order and try to interfere or scuttle the investigation in any manner undertaken by the CBI or else a strict view shall be taken by this Court.
31. With the aforesaid, both the appeals stand disposed of.
32. In view of the above, the connected civil applications also do not survive and are disposed of accordingly.
(J. B. PARDIWALA, J) (NIRAL R. MEHTA,J) Vahid Page 44 of 44 Downloaded on : Wed Jan 12 14:08:10 IST 2022