Gujarat High Court
Hemant Shantilal Shah vs Reserve Bank Of India on 22 February, 2023
Author: Bhargav D. Karia
Bench: Bhargav D. Karia
NEUTRAL CITATION
C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 10803 of 2022
FOR APPROVAL AND SIGNATURE:
HONOURABLE MR. JUSTICE BHARGAV D. KARIA
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1 Whether Reporters of Local Papers may be allowed
to see the judgment ?
2 To be referred to the Reporter or not ?
3 Whether their Lordships wish to see the fair copy
of the judgment ?
4 Whether this case involves a substantial question
of law as to the interpretation of the Constitution
of India or any order made thereunder ?
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HEMANT SHANTILAL SHAH
Versus
RESERVE BANK OF INDIA
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Appearance:
ARJUN R SHETH(7589) for the Petitioner(s) No. 1,2,3,4
KULDEEP K ADESARA(9222) for the Respondent(s) No. 2
MR KM PARIKH(575) for the Respondent(s) No. 2
MR.VISHAL J DAVE(6515) for the Respondent(s) No. 3
MS. HIRAL U MEHTA(7003) for the Respondent(s) No. 3
NIPUN SINGHVI(9653) for the Respondent(s) No. 3
NOTICE SERVED BY DS for the Respondent(s) No. 1
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CORAM:HONOURABLE MR. JUSTICE BHARGAV D. KARIA
Date : 22/02/2023
ORAL JUDGMENT
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1. Heard learned advocate Mr. Arjun R. Sheth for the petitioners and learned advocate Mr. K.M. Parikh for respondent no.2 and learned advocate Ms. Hiral U. Mehta for respondent no.3
2. Rule returnable forthwith. Learned advocate Mr. K.M. Parikh waives service of notice of rule on behalf of respondent no.2 and learned advocate Ms. Hiral U. Mehta waives service of notice of rule on behalf of respondent no.3
3. By this petition under Article 226 of the Constitution of India, the petitioners have prayed to quash and set aside the impugned order dated 09.02.2021 along with letters dated 11.04.2022, 10.05.2021, 19.05.2021 and 11.05.2021 and letter dated 1.06.2022 issued by respondent no.2 identifying the respondent no.3 company and the petitioners as "Willful Page 2 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined Defaulter" and further prayed to restrain the respondent no.2 bank from reporting the name of the petitioners to RBI/CIBIL as "Willful Defaulters".
4. Brief facts of the case are as under :
4.1) The petitioners are the shareholders and the suspended Directors of respondent no.3 company - Care Office Equipment Limited.
4.2) Respondent no. 3 company is a public limited company incorporated in the year 1998 and was engaged into the business of retail trading of electronic appliances having retail outlets across Gujarat. The respondent no.3 company was a distributor for companies like Dell, HP, Asus, etc. for products like laptops, computers, computer accessories, etc. Page 3 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 4.3) Respondent no. 3 is currently under Corporate Insolvency Resolution process under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the "IB Code") vide admission order dated 29.05.2019 in the matter of Ingram Micro Pvt. Ltd. v. Care Office Equipment Ltd., being Company Petition (Insolvency and Bankruptcy) no. 602 of 2018 before the National Company Law Tribunal, Ahmedabad. The National Company Law Tribunal appointed Mr. Vikash Jain as the Resolution Professional of the respondent no.3 (here-in-
after referred to as "the Corporate Debtor") vide order dated 27.09.2019 in Interlocutory Application no. 476 of 2019 in CP (IB) no. 602 of 2018.
4.4) The Corporate Debtor had availed certain financial facilities from consortium lenders being the respondent no. 2 bank and Canara Bank in the year 2013 which was again Page 4 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined renewed and revived in the year 2017. 4.5) It is the case of the petitioners that during the 8th Committee of Creditors meeting dated 26.02.2020 of the respondent no. 3 Company, it was categorically discussed that based on the Forensic Audit Report there appears to be no preferential transaction (under section 43 of the IB Code), undervalued transaction (under section 45 of the IB Code), extortionate transaction (under section 50 of the IB Code) and fraudulent transaction (under section 66 of the IB Code). Hence, the Committee of Creditors(CoC) based on the Transaction Audit Report had come to the conclusion that there is no fraud discernible by the respondent no. 3 company. 4.6) The petitioners however, received a show cause notice dated 27.02.2020 from the respondent no. 2 (received by the petitioners Page 5 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined on 05.03.2020) alleging Willful default by the Corporate Debtors and identifying the petitioners as Willful Defaulter as per the RBI Circular dated 01.07.2015 by placing reliance on Forensic Audit report dated 26.12.2018 by one M/s R.S Patel and Co. It is the case of the petitioners that 8th COC meeting was attended by the Deputy General Manager and the Assistant General Manager of the respondent no. 2 bank and they after coming to the conclusion that there is no fraud, had issued such frivolous show-cause notice dated 27.02.2020 to pressurize the petitioners to bend to the tunes of the respondent no. 2 bank.
4.7) It is the case of the petitioners that respondent no. 2 had never supplied a copy of the Forensic Audit report dated 26.12.2018 to the petitioners which is against the principles of natural justice as Page 6 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined it is a settled principle of law that the evidence relied by the respondent no. 2 must be put to the petitioners against whom such adverse conclusion is made in order to give a full opportunity to represent their case. 4.8) The petitioner no. 1 on behalf of all the petitioners had given a detailed reply vide letter dated 20.03.2020 to the respondent no. 2 providing clarifications and justifications to the alleged willful default.
4.9) It is the case of the petitioners that during that period a nation-wide lock down was imposed because of the Covid pandemic and the petitioner no. 1 was unable to post/courier the letter to the respondent no. 2 bank at that time. However, the petitioner no. 1 vide email dated 26.03.2020 had attached the letter dated 20.03.2020 to Page 7 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined the respondent no. 2 Bank and couriered the same to the respondent no. 2 Bank's branch office in Ahmedabad and via Speed Post to the branch office in Mumbai on 19.05.2020. 4.10) Respondent no. 2 bank vide email dated 13.08.2020 to the petitioners had acknowledged the receipt of the representation letter dated 20.03.2020 by the petitioner no. 1 on behalf of the petitioners and given an opportunity of hearing (through Video Conferencing at the Branch office of the Respondent no. 2 bank in Ahmedabad) to the petitioners on 19.08.2020 to 21.08.2020 to represent their case. It is the case of the petitioners that petitioner no. 1 vide email dated 17.08.2020 had duly informed the respondent no. 2 bank that due to certain health issues and for religious reasons being 'Paryushan', the petitioners would not be in a position to attend the hearing dated Page 8 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 19.08.2020 to 21.08.2020 and had requested for adjournment.
4.11) It is the case of the petitioners that respondent no. 2 bank vide email dated 14.08.2020 to the petitioners itself admits to the fact that during the Forensic Audit report dated 26.12.2018 conducted by the auditors, they could not trace any fraudulent transactions against the respondent no. 3 Company and therefore, the respondent no. 2 Bank had come to the conclusion that there is "No Fraud" committed by the respondent no. 3 Company. Furthermore, it was also noted that the Resolution Professional of the respondent no. 3 Company had appointed independent auditor being one Joshi Mahajan and Co. and the forensic audit report dated 12.02.2020 also could not trace any fraudulent transactions. This clearly shows that the respondent no. 3 company had never engaged in Page 9 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined any fraudulent transactions for any ulterior motives or wrongful gains.
4.12) The petitioners had again received an email dated 29.10.2020 from the respondent no. 2 bank for personal hearing on the first or second week of November, 2020. However, due to unavailability of certain directors of the Corporate Debtors and reasons beyond the control of the petitioners, the petitioners had requested for adjournment vide email dated 04.11.2020.
4.13) It is the case of the petitioners that the petitioners had not received any response to the above stated email from the respondent no. 2 bank for a period of about 7 months.
4.14) The petitioners thereafter received an intimation letter dated 19.05.2021 from Page 10 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined the respondent no. 2 bank (which was received on 27.05.2021) intimating the petitioners that the petitioners had been declared as "Willful defaulters" by the respondent no. 2 bank and informing further that the respondent no. 2 bank had accepted the recommendations of the department and declared the petitioners as the "Willful Defaulters" vide a memorandum dated 27.04.2021 which was subject to confirmation from the Review committee of the respondent no. 2 bank. It is the case of the petitioners that respondent no. 2 bank had also passed an order dated 10.05.2021 identifying the petitioners as 'Willful Defaulters' without supplying a copy of the same which is in grave violation of the RBI Circular dated 01.07.2015, settled position of law and principles of natural justice. It is the case of the petitioners that respondent no. 2 had also not supplied the copy of the memorandum Page 11 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined dated 27.04.2021 to the petitioners which is put forward to the Review committee of the Respondent no.2 for its confirmation and respondent no. 2 bank being an instrumentality of the State acted in a high- handed manner with a pre-determined mindset to declare the petitioners as "Willful Defaulters" under the said circular. Respondent no. 2 has failed to take into consideration the detailed representations made by the petitioners in its letter dated 20.03.2020 and come to such an adverse conclusion.
4.15) After receiving the letter dated 19.05.2021 from the respondent no. 2 bank (which was received on 27.05.2021), the petitioner no. 1 (on behalf of all the petitioners) had immediately replied vide letter dated 29.05.2021 and had requested the respondent no. 2 bank to supply copies of the Page 12 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined memorandum dated 27.04.2021 and order dated 10.05.2021 by the Identification Committee of the respondent no. 2 bank declaring the petitioners as the 'Willful Defaulters'. The petitioner no. 1 had pointed out that the petitioner no. 1 had requested for some other suitable date of hearing to the respondent no. 2 bank and to take into consideration the representations/ clarifications / submissions made by the petitioner no. 1 vide representation letter dated 20.03.2020. However, the Respondent no.2 bank has till date not supplied the copies of the memorandum dated 27.04.2021 and order dated 10.05.2021 to the petitioner no. 1 despite a specific request being made by the petitioner no. 1 (on behalf of all the petitioners) which is in gross violation to the RBI Circular dated 01.07.2015, settled position of law and principles of natural justice. Page 13 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 4.16) It is the case of the petitioners that after almost one year thereafter, the petitioners had again received a letter dated 11.04.2022 from the respondent no. 2 bank whereby the petitioners came to know that respondent no. 2 had passed an order dated 09.02.2021 declaring the petitioners as "Willful Defaulters". It is the case of the petitioners that respondent no. 2 had completely ignored the request of petitioners to supply the memorandum dated 27.04.2021 and copy of order dated 10.05.2021 to the petitioners and had falsely stated that the respondent no. 2 bank had supplied the order of the Identification Committee to the petitioners. It is the case of the petitioners that respondent no. 2 bank has acted in a high-handed manner and passing orders of willful default against the petitioners without supplying a copy to the petitioners despite the fact that such orders Page 14 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined have grave consequences on the promoter and may also attract criminal liabilities. Furthermore, it is the case of the petitioners that the respondent no. 2 bank has vaguely stated that the request of personal hearing of the petitioners would be subject to the approval of the respective committee without providing any clarity on it whatsoever.
4.17) The petitioners thereafter received a letter dated 01.06.2022, (which was received by the petitioners on 06.06.2022) from the respondent no. 2 Bank stating that the Review Committee of the Respondent no. 2 Bank in its meeting dated 25.04.2022 had examined and reviewed the findings of the order of the Identification Committee and have confirmed the declaration of 'Willful Defaulters' against the petitioners. Page 15 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 4.18) It is the case of the petitioners that on a bare perusal of the letter dated 01.06.2022, it can be seen that the respondent no. 2 Bank now has once again relied on some other order dated 11.05.2021 by the Identification Committee in declaring the petitioners as "Willful Defaulters" which has been never supplied to the petitioners. Respondent no. 2 bank in various communication/intimation letters have mentioned various orders (having different dates) passed by the Identification Committee declaring the petitioners as "Willful Defaulters", however the respondent no. 2 has blatantly failed in abiding with the RBI Circular dated 01.07.2015 and settled position of law by not supplying the same to the petitioners.
4.19) It is the case of the petitioners that the petitioners have in good faith Page 16 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined always provided clarifications/ replies to the respondent no. 2, however the respondent no. 2 has acted in a high handed manner by not supplying copies of the memorandum dated 27.04.2021, orders dated 09.02.2021. 10.05.2021 and 11.05.2021 of willful default to the petitioners and this also shows the predetermined mindset of the respondent bank. 4.20) It is the case of the petitioners that the petitioners had in detail explained to the respondent no. 2 from time to time that the main reason for the default in question was because of the fraud committed by one Dell International Services India Pvt. Ltd. and the petitioners have taken appropriate legal actions in competent forum which goes to show that the default committed by the petitioners are not willful, deliberate or intentional as per the conditions laid down in the RBI Circular Page 17 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined dated 01.07.2015. Furthermore, the petitioners, in good faith and with the intention to clear the outstanding dues of the respondent no. 2 bank, had put forth various settlement proposals to the respondent no. 2 bank in order to clear the liabilities of the respondent no. 2 Bank and the petitioners had also offered peaceful possession of its personal properties which were free from any encumbrances to the respondent no. 2 Bank which shows the bonafide intention of the petitioners to pay off its liabilities to the Respondent no. 2 Bank. However, the respondent no. 2 Bank had never replied to the petitioners to settle the matter. The petitioners had also provided a Corrective Action Plan along with the covering letter dated 02.02.2018 (which was signed and received by the Respondent no. 2 Bank on 03.02.2018) which shows the bonafide intention of the petitioners to pay off its Page 18 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined liabilities to the respondent no. 2 Bank. 4.21) It is the case of the petitioners that respondent no. 3 company while availing facilities with the respondent no. 2 bank had mortgaged 6 properties with the respondent no. 2 and the respondent no. 2 by auctioning the same has realized the amounts received for the same. Furthermore, the petitioners in good faith and with the intention to reduce the liabilities with the respondent no. 2 bank had on its own provided the personal property of the petitioners (which was not mortgaged with the respondent no. 2 bank) to the respondent no. 2 bank and the said property was sold and the amount realized was approximately Rs. 95 lakhs which were deposited by the petitioners to the respondent no. 2 bank to clear the outstanding liabilities of the respondent no. 3 company.
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NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 4.22) It is the case of the petitioners that respondent no. 2 bank had renewed and revived the credit facilities to the petitioners in the year 2017 based on the track record of the petitioners and the Banks should take into account the track record of the Borrowers and not come to any adverse finding based on a single transaction. 4.23) Being aggrieved by the aforesaid action of the respondent bank, the petitioners have preferred the present petition.
5. Learned advocate Mr. Arjun Sheth for the petitioners submitted that respondent no. 2 has illegally classified the petitioners as willful defaulter and have failed to abide by the relevant provisions of the RBI Circular dated 01.07.2015.
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NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 5.1) Relying upon the judgment of the Hon'ble Supreme Court in the case of State Bank of India v Jah Developers Private Limited and Ors., (2019) 6 SCC 787, it was submitted that the Supreme Court has laid down guidelines with respect to para 3 (d) of the RBI Circular dated 01.07.2015 which is as follows :
"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 Page 21 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined borrower in a show cause notice to elicit the borrower's submissions on the same. However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/ financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that paragraph 3 of the Master Circular dated 01.07.2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials being the First Committee, after following paragraph 3(b) of the Revised Circular dated 01.07.2015, must give its order to the borrower as soon as it is made.Page 22 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 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."
5.2) It was submitted that as per the guidelines laid down in the case of State Bank of India v Jah Developers Private Limited and Ors.(supra), it is incumbent on the Bank to supply a copy of the order by the Identification Committee to the borrower to enable him to represent his case before the Review committee.
5.3) Learned advocate Mr. Sheth submitted that in the present case the respondent no. Page 23 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 2 bank has acted in a high-handed manner and has failed to supply the copies of the orders dated 09.02.2021, 10.05.2021 and 11.05.2021 of willful default passed by the Identification Committee which is in contravention to the guidelines laid down by the Hon'ble Supreme Court and such orders are erroneous, perverse, illegal and deserves to be set aside.
5.4) Relying upon the judgment of this Court in case of Galaxy Cotton and Textile Pvt. Ltd. and Ors., v. Reserve Bank of India and Ors. rendered in Special Civil Application No. 8928/2017, it was submitted that this Court had quashed and set aside the impugned action of the Bank as they had failed to supply the copy of the order to the borrower despite a written request being made to the Bank.
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NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 5.5) It was submitted that petitioner no. 1 (on behalf of all the petitioners) vide letter dated 29.05.2021 had requested the respondent no. 2 Bank to provide/supply a copy of the order to the petitioners despite the same the respondent no. 2 with connivance and malafide intention have failed to supply the same to the petitioners.
5.6) Reliance was also placed on decision of Kerala High Court in the case of Ravis Exports and Ors. v. Union of India and Ors., in WP (C) 2427 of 2020 wherein vide order dated 18.05.2022, it was held as under:
"A glance at the above observations of the Supreme Court reveals that the decision of the COE ought to be given to the borrower, as soon as it is made and thereafter an opportunity is to be given to the borrower to represent against the said decision, based on which the Review Committee must pass a reasoned order. The order of the Review Committee must also be given to the borrower. Apart from the above, a perusal of the Master Page 25 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined Circular reveals that the COE must consider the explanation submitted by the borrower and give reasons for recording the fact of wilful default. The aforementioned safeguards are inbuilt mechanisms to prevent arbitrary action on the part of banking entities to declare persons as wilful defaulters merely for the asking. Yet another safeguard is provided in paragraph 2.1.3 of the Circular that the identification of wilful default should be made keeping in view the track record of the borrowers. and conclusion should not be based on isolated transactions/ incidents and the default to be categorised as wilful must be intentional, deliberate and calculated."
5.7) Learned advocate Mr. Sheth submitted that respondent no. 2 bank has grossly failed to supply copy of the order of the Identification Committee to the petitioners which is in contravention to the RBI Circular dated 01.07.2015 and law laid down by the Hon'ble Supreme Court in State Bank of India v Jah Developers Private Limited and Ors(supra).
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NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 5.8) It was submitted that a bare perusal of the letters dated 01.06.2022, 11.04.2022 and 19.05.2021 from the respondent no. 2 bank to the petitioners it can be seen that there is a discrepancy in the date of the orders of the Identification Committee being 09.02.2021, 10.05.2021 and 11.05.2021. 5.9) Learned advocate Mr. Sheth submitted that since no order is supplied to the petitioners and there being no clarity on the order of the Identification Committee or the date of such order, the same deprives the petitioners from his right to represent his case before the Review Committee. 5.10) It was submitted that the Deputy General Manager and the Assistant General Manager of respondent no. 2 Bank after having discussed and concluded in the 8th CoC meeting dated 26.02.2020 of the respondent no. 3 Page 27 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined company that no preferential transaction (under section 43 of the IB Code), undervalued transaction (under section 45 of the IB Code), extortionate transaction (under section 50 of the IB Code) and fraudulent transaction (under section 66 of the IB Code) have been committed by the Corporate Debtors, cannot unilaterally identify or pass orders of willful default under the RBI Circular dated 01.07.2015.
5.11) It was submitted that it is incumbent upon the respondent no. 2 supply the said order to the petitioners / borrower and any breach thereof would be in violation of Article 19(1)(g) of the Constitution of India.
5.12) Learned advocate Mr. Sheth submitted that the order of willful default has direct consequences on the petitioners which are as Page 28 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined follows (Clause 2.5- penal measures of the RBI Circular dated 01.07.2015):
(i) No additional facilities to be granted by any bank/ financial institutions.
(ii) Entrepreneurs/ Promoters would be barred from institutional finance for a period of 5 years.
(iii) Any legal proceedings can be initiated, including criminal complaints.
(iv) Banks and financial institutions to adopt proactive approach in changing the management of the willful defaulter.
(v) Promoter/ Director of wilful defaulter shall not be inducted by another borrowing company.Page 29 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
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(vi) As per S.29A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot be a resolution applicant. 5.13) It was submitted that considering the the stringency of the consequences of the declaration of Willful Default under clause 2.5 of the RBI Circular dated 01.07.2015, it is essential for the Bank to supply the order to the petitioners in order to give a full opportunity to represent the case. 5.14) It was submitted that respondent no. 2 Bank has failed to establish that the default committed by the petitioners is intentional, deliberate and calculated as stipulated in the RBI Circular dated 01.07.2015 and respondent no. 2 Bank has failed to consider the track record of the petitioners and the Respondent no. 3 company before coming to such an adverse conclusion. Page 30 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 5.15) Learned advocate Mr. Sheth submitted that respondent no. 2 has failed to consider the bona fide intention of the petitioners to settle the matter and has not taken into consideration the settlement proposal put forth by the petitioners.
5.16) It was submitted that the petitioners are aggrieved by the arbitrary actions of the respondent No. 2, in unilaterally declaring the petitioners as Willful Defaulter based on forensic audit report of R.S. Patel and Co., a copy of the said report was never supplemented to the company or its directors at the relevant time which is in itself violative of principles of natural justice. Reliance was placed on the judgment dated 10.12.2020 in WP no. 19102 of 2019 passed by the High Court for the State of Telangana at Hyderabad and order dated Page 31 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 15.04.2021 passed by the Hon'ble Supreme Court in SLP No.3932/2021.
5.17) It was submitted that respondent no. 2 has failed to supply the Forensic Audit report dated 26.12.2018 by one M/s R.S Patel and Co. based on which reliance is placed by the respondent no. 2 in coming to such an adverse conclusion. Reliance is placed on the judgments of Calcutta High Court in the case of Suresh Kumar Patni and Ors. v. Punjab National Bank and Ors. reported in MANU/WB/0818/2020 and Madras High Court in the case of Subhiksha Trading Services v. Kotak Mahindra Bank Limited, reported in MANU/TN/1454/2009 wherein it is held that the non-supply of the copy of the final forensic report at the relevant time is in grave violation of principles of natural justice and proves fatal to all subsequent steps taken by the bank pursuant to the same. Page 32 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 5.18) It was submitted that respondent No. 2 bank has failed to point out to the petitioners the basis on which the respondent no. 2 had arrived to such a conclusion and it has also failed in providing any documents to the petitioners which had led to such a result.
5.19) It was submitted that the action of respondent No. 2 in declaring the petitioners as 'Willful Defaulters' without providing adequate opportunity of hearing to the petitioners, is ex-facie erroneous, unreasonable, capricious, perverse, unfair, arbitrary and patently violative of principles of equity, natural justice and constitutional rights of the petitioners enshrined under Articles 14, 19 (1) (g) and 21 of the Constitution of India. Page 33 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 5.20) Learned advocate Mr. Sheth submitted that it is incumbent upon respondent No. 2 to have conformed to the basic rules of fairness, including observing principles of natural justice, in relation to conducting any enquiry concerning the petitioners in relation to alleged 'Willful Default'. 5.21) It was submitted that it is not permissible to the respondent No.2 to proceed unilaterally against the petitioners, without fair opportunity, as required in law, including observance of principles of natural justice.
5.22) Learned advocate Mr. Sheth submitted that since the petitioners are classified as 'Willful Defaulters' under the Master Circular, then as per clause 2.5 of the Master Circular, the petitioners would be debarred from institutional finance from Page 34 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined Scheduled Commercial Banks, Financial Institutions, NBFCs, etc. for floating new, ventures for a period of 5 years from the date of removal of the petitioners names as "Willful Defaulters".
5.23) It was submitted that as per Clause 2.5 (c) the Banks and Financial Institutions can also change the management of the willfully borrowing unit, which would lead to grave injustice to the petitioners as the Petitioners would be denied the fundamental right guaranteed under Article 19 (1) (g) to carry on a trade or business.
5.24) It was submitted that as per clause 2.5 (b) of the RBI Circular dated 01.07.2015, the petitioners will be vulnerable to any kind of criminal proceedings initiated against it and the impugned action of respondent Nos.2 is ultra vires Articles 14, Page 35 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 19(1) (g) and 21 of the Constitution of India.
6. On the other hand, the learned advocate Mr. K.M. Parikh for respondent no.2 submitted that that the principal controversy as raised by the petitioners in the present petition relates to the declaration of the account of the principal borrower as Willful Defaulter by Identification Committee and confirmed by Review Committee of respondent No. 2 Bank as per provisions and procedures prescribed in the Master Circular dated 01.07.2015 issued by respondent No. 1 and the second challenge by the petitioners is non-compliance of principles of natural justice by Identification Committee and Review Committee as alleged in the petition.
6.1) It was submitted that respondent No. 2 Bank have not declared principal borrower Page 36 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined Company as Willful Defaulter since account of principal borrower is under NCLT Resolution. It was submitted that respondent No. 2 issued show cause notice dated 27.02.2020 and called upon the petitioners to show cause why the petitioners be not declared as "Willful Defaulters" in terms of RBI guidelines vide circular dated 1st July, 2015. It was submitted that the petitioners had submitted reply and made detailed representation vide their letter dated 20.03.2020 and objected the proposed decision of the Identification Committee to identify and declare the petitioners as "Willful Defaulters" in terms of RBI Master Circular dated 01.07.2015. 6.2) Learned advocate Mr. Parikh submitted that the decision to identify a borrower as "Willful Defaulter" is to be taken by Committee chaired by the Executive Director and any two, General Manager/Deputy Page 37 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined General Manager, from Asset Recovery Department/Large Corporate/Mid Corporate/Credit Department of the Bank as per Bank's regulations and such Committee approved the minutes of the Bank in their meeting held on 24.01.2015. It is in this background that recovery department, head office of Respondent No. 2 Bank formed Committee consisting of ED, GM(Corporate Credit) and DGM (SARD) and submitted Memorandum dated 03.02.2020 to such Committee for consideration of Committee for identifying and reporting instances of Willful Default.
6.3) It was submitted that based on the information pertaining to defaulting borrower submitted by Ahmedabad Large Corporate Branch of respondent No. 2 Bank and considering the reasons/justification sent by Respondent No. 2 Bank's Branch at Ahmedabad for the kind Page 38 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined approval of Identification Committee of Respondent No. 2 Bank along-with details and reasons of Willful Default, Identification Committee had identified the Borrower as Willful Defaulter and therefore, recovery department, HO, Mumbai of Respondent No. 2 Bank issued notice dated 27.02.2020 as chance to the petitioners including principal borrower by way of one more opportunity. 6.4) It is submitted that petitioners made reply vide letter dated 20.03.2020 in response to notice dated 27.02.2020 issued by respondent No.2 Bank. Thus, admittedly respondent no.2 Bank has granted ample opportunities to the petitioners to make their submissions against the show cause notice issued before declaring them as willful defaulters as per RBI guidelines. Hence, there is a compliance of principles of natural justice at the stage of show cause Page 39 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined notice.
6.5) It was submitted that on the basis of the facts on record and submissions in reply to show cause notice made by the petitioners, the Identification Committee headed by Executive Director and comprising of two General Managers had accepted the recommendations of the branch of Respondent No. 2 Bank and had declared the petitioners as "Willful Defaulters" vide its Memorandum dated 27.04.2021. It was submitted that since, Master circular issued by RBI does not prescribe any procedure for effective service of order passed by Identification Committee of the bank and therefore, after declaring the petitioners as willful defaulters, the said declaration by respondent No.2 Bank came to be intimated to the petitioners vide letter dated 19.05.2021. Thus, there is a intimation by the bank to the petitioners Page 40 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined about the decision taken by Identification Committee declaring the petitioners as willful defaulters.
6.6) Learned advocate Mr. Parikh submitted that the respondent No. 2 Bank issued a intimation notice dated 19.05.2021 to the petitioners intimating them about the order of Identification Committee dated 10.05.2021 of declaring them as "Willful Defaulters" and further granted them 15 days' time from the date of receipt for submitting their representation for consideration before Review Committee. Thus, respondent no. 2 Bank also granted further opportunity to the petitioners to avail the remedy of making representation further before the Review Committee.
6.7) It was submitted that in compliance of such notice-cum-intimation of Page 41 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined the order, the petitioners made representation dated 29.05.2021 to the intimation letter dated 19.05.2021 issued by Respondent No. 2 Bank of India. 6.8) Learned advocate Mr. Parikh submitted that since respondent no.2 Bank has strictly followed the procedure prescribed under the master guidelines dated 01.07.2015 issued by RBI in this regard, this Court may hold that respondent No.2 Bank had complied with the guidelines in letter and spirit and had afforded fair and reasonable opportunity of hearing to the petitioners and therefore, to this process as followed by Resp. No.2 Bank, no fault prima facie can be found and therefore, the process of decision making and decision taken by the bank both are legal, justified and in accordance with the master guidelines dated 01.07.2015 issued by RBI in this regard.
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NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined 6.9) It was submitted that respondent no.2 Bank has not made any deviations in complying the master guidelines dated 01.07.2015 issued by RBI in this regard while declaring the petitioners as willful defaulter by Identification Committee and confirming the same decision by the Review Committee and therefore, decision of both the committees taken by respondent no.2 Bank require to be declared as valid, proper, justified and in accordance with law as it exists as per master guidelines dated 01.07.2015 issued by RBI.
6.10) It was submitted that the petition filed by petitioners lacks merit and deserves no consideration and when the petitioners have made representations in pursuance to show cause notices issued at both the stages, this Court may hold that it is sufficient Page 43 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined compliance of master guidelines dated 01.07.2015 issued by the RBI. It was submitted that the decision taken by Identification Committee declaring the petitioners as willful defaulters and consequential confirmation of said decision the first committee by the Review Committee of respondent no.2 Bank requires to be upheld by this Court and present petition, being devoid of any merit, deserves to be dismissed.
6.11) It was submitted that all the judgements cited and relied upon by the petitioners to sustain the petition are not applicable to the facts of the case and the same are clearly distinguishable. It was therefore, submitted that petition may not be entertained.
7. Having heard the learned advocates for the Page 44 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined respective parties and having gone through the materials on record, in order to appreciate the contentions raised by the respective parties, it would be germane to refer to few Clauses of Master Circular on willful defaulter dated 1st July, 2015 issued by the RBI.
"Clause 2.1.3 : Wilful Default : A 'willful default' would be deemed to have occurred if any of the following events is noted:
(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has not utilised 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 Page 45 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender.
The identification of the willful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/ incidents. The default to be categorised as willful must be intentional, deliberate and calculated."
Clause no. 2.5 : Penal Measures The following measures should be initiated by the banks and FIs against the willful defaulters identified as per the definition indicated at paragraph 2.1.3 above:
a. No additional facilities should be granted by any bank / FI to the listed willful defaulters. In addition, Page 46 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined such companies (including their entrepreneurs / promoters) where banks/ FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, financial institutions, NBFCs, for floating new ventures for a period of 5 years from the date of removal of their name from the list of willful defaulters as published/disseminated by RBI/CICs.
b. The legal process, wherever warranted, against the borrowers/ guarantors and foreclosure for recovery of dues should be initiated expeditiously. The lenders may initiate criminal proceedings against willful defaulters, wherever necessary.
c. Wherever possible, the banks and FIs should adopt a proactive approach for a change of management of the willfully defaulting borrower unit.
d. A covenant in the loan
agreements, with the
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undefined
companies to which the banks/ FIs have given funded/ non-
funded credit facility, should be incorporated by the banks/ FIs to the effect that the borrowing company should not induct on its board a person whose name appears in the list of willful defaulters and that in case, such a person is found to be on its board, it would take expeditious and effective steps for removal of the person from its board.
It would be imperative on the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action.
Clause no.3 : Mechanism for
identification of willful
defaulters.
The mechanism referred to in
paragraph 2.5 above should
generally include the following :
(a) The evidence of willful default on the part of the borrowing company and its promoter/whole-time director at the relevant time should Page 48 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM/DGM.
(b) If the Committee concludes that an event of willful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter/ whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of willful default and the reasons for the same. An opportunity should be given to the borrower and the promoter/ whole-time director for a personal hearing if the Committee feels such an opportunity is necessary.
(c) The Order of the Committee should be reviewed by another Committee headed by the Chairman/ Chairman & Managing Director or the Managing Director & Chief Executive Officer/ CEOs and consisting, in addition, to two independent directors/ non-
executive directors of the bank and the order shall become final only after it is confirmed by the said Review Committee. However, if the Page 49 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined Identification Committee does not pass an order declaring a borrower as a willful defaulter, then the Review Committee need not be set up to review such decisions."
8. Thus, clause 2.1.3 defines 'willful default' as to who can be said to have committed a willful default as enumerated in Clause (a) to (d). Whereas, Clause-3 provides for mechanism for identification of willful defaulters. Clause - 2.5 provides consequences of declaring any lender as willful defaulter resulting into penal measures including criminal case. On perusal of the above provisions of Master Circular, the Identification Committee is required to examine the availability of evidence of willful default on the part of the borrower company and its promoter/whole time director and if such committee concludes that in the event of willful default is occurred, it is obligatory on the part of the Identification Page 50 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined Committee to issue a show cause notice to the concerned borrower and promoter whole time director calling for their submissions and after considering their submissions an order recording the fact of willful default has to be passed giving reasons for the same. Therefore, it is incumbent upon the Identification Committee to provide an opportunity of personal hearing to the borrower and promoter, whole time director or the persons, who are to be considered as willful defaulter and the decision of such Identification Committee is to be reviewed by any other Committee, which is Review Committee as per Clause-3(c) of the Master Circular.
9. The Division bench of the Bombay High Court in case of M/s. Kanchan Motors and others vs. Bank of India and others reported in 2018 SCC OnLine Bom 1761 has held as under with regard Page 51 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined to violation of principles of natural justice as under:
"14. On the close scrutiny of the aforesaid provisions of Master Circular, it is clear that the consequences of declaring any lender as wilful defaulter are serious in nature. It is also clear that for declaring a lender to be wilful defaulter specific finding is required to have been recorded in terms of Clasue 2.1.3(a) to (d) as the case may be. The Master Circular also provides a mechanism to be adopted for identifying the wilful defaulter. It includes, availability of evidence of wilful default on the part of borrowing company and its promoter/whole-time director which needs to be examined by the Identification Committee. If the Committee concludes that an event of wilful default has occurred, it is obligatory on the part of Identification Committee to issue a show cause notice to the concerned borrower and the promoter/whole-time director calling from their submissions and after considering their submissions as may be received, an order recording the fact of wilful default has to be passed after giving reasons for the same. It is also incumbent upon the Identification Committee to give an opportunity of personal hearing to borrower & promoter/whole-time director if it feels that such opportunity is necessary. The said order of the Committee needs to be reviewed by another Committee (Review Committee) as per Clause 3(c) of the Master Circular.
15. Examining the present matter on the touch stone of the aforesaid provisions, we find that the Respondent Bank has failed to Page 52 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined comply with the aforesaid mechanism provided under the Master Circular. It is clear from the record that in response to the notice issued by the Bank informing the Petitioners about their intentions to proceed against them for declaring them as willful defaulter and giving last chance to deposit outstanding amounts, the Petitioners have submitted a detailed reply dated 29th January, 2018 giving reasons as to why such proceeding cannot be initiated. However, it appears that thereafter the Identification Committee has passed an order on 9th March, 2018 recording that the Petitioners have committed wilful default. It is also an admitted fact that the copy of the order dated 9th March, 2018 was not supplied to the Petitioners even though a written request for the same was made. Moreover, in the stand of the Bank in reply to the Petition, it is stated that is not necessary to supply the copy of the order of the Identification Committee to the Petitioners.
16. In the circumstances, in our considered view the Respondents while declaring the Petitioners as wilful defaulter have violated the provisions contained in the Master Circular and have also acted in violation of the principles of natural justice. The impugned action which is penal in nature has been taken causing serious implication on the Petitioners without following the basis principles of natural justice. The impugned order of Review Committee as is clear from a bare reading of it, is a non speaking order as the operative part of the order of Review Committee which contains the reasons reads thus:
"The Review Committee has examined and reviewed the proceedings initiated order Page 53 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined and the findings of the Identification Committee and found that they are in order and confirmed that you have committed the following willful default:--
(Reasons) The unit has defaulted reasons in meeting its payment/repayment obligation to the lender and has not utilized the finance from lender even when it has capacity to honour the said obligations."
17. This according to our considered view the order of the Review Committee cannot be termed as reasoned order and as such it cannot be sustained.
18. We are also of the considered view that the Respondent Bank cannot be allowed to say that it is not necessary for them to supply copy of the order passed by the Identification Committee. As would be clear from Clause 3(b) of the Master Circular the Identification Committee has to record reasons while passing the order of recording the fact of commission of wilful default as also to assign valid reasons as to whether it is necessary to give the borrower and the the promoter/whole time director the opportunity of personal hearing. This requirement whether has been complied with or not could have been examined only if the said order was brought on record. But strangely in reply the Bank has taken a stand that the order dated 9 th March, 2018 passed by the Identification Committee is the internal order and it is not supposed to be served upon the Petitioners. It is also stated by the Respondents in the reply that no question arises of serving the order dated 9th March, 2018 on the Petitioners and that the order dated 9th March, 2018 is the preliminary Page 54 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined internal order and after its finalization by Review Committee, it is conveyed to the Petitioners. Thus from the stand taken by the Respondents, it is clear that they have neither supplied copy of the order passed by the Identification Committee to the Petitioners nor according to them it was necessary. It is also very strange that the said order has not even been brought on record by the Bank to deny the Petitioners' contention that their grounds raised th through reply dated 29 January, 2018 to show cause notice against proposed declaration of wilful defaulter have not been considered and that as to why the Petitioners were denied the opportunity of being heard.
19. In our considered view the stand of the Bank that they are not obliged to furnish copy of the order passed by the Identification Committee cannot be sustained. Such stand if accepted would given rise to arbitrary exercise of powers as the Identification Committee may give complete go bye to the requirement of assigning reasons for declaring a party as Wilful Defaulter and also requirement of giving reasons as to why opportunity of personal hearing would not be necessary.
20. In the present case, as already observed even the order of Review Committee is bereft of any reasons for arriving at the conclusion that, "the Petitioners have defaulted in meeting its payment/repayment obligation to the lender even when it has capacity to honour the said obligation.
21. Having regard to the aforesaid in our considered view failure to supply the reasons by the Identification Committee of Page 55 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined recording the fact that the Petitioners are in wilful default and as to why they need not be given an opportunity of hearing when in their reply dated 29th January, 2018 the Petitioners have raised various grounds opposing the proposed action of declaring them willful defaulter and sought opportunity of personal hearing cannot be said to be justified. Similarly absence of reasons in the order of Review Committee also amounts to denial of justice. It is now well settled that reasons are the live links between the minds of the decision taker to the controversy in question and the decision or conclusion arrived at. Reasons substitute subjectivity to objectivity right to reason is an indispensable part of sound judicial system. The rational is that the affected party can know why the decision has gone against him. One of the statutory requirement of the natural justice is spelling out reasons for the order made, in other words a speaking order. Even in respect of administrative order the giving of reasons is one of the fundamentals of good administration."
10. The Apex Court in case of State Bank Of India Vs. Jah Developers Private Limited and Others (Supra) while denying the right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 01.07.2015, has held that Revised Circular, being in public Page 56 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined interest, must be construed reasonably as under:
"15. The next question that arises is whether an oral hearing is required under the Revised Circular dated 1-7- 2015. We have already seen that the said circular makes a departure from the earlier Master Circular in that an oral hearing may only be given by the First Committee at the first stage if it is so found necessary. Given the scheme of the Revised Circular, it is difficult to state that oral hearing is mandatory. It is even more difficult to state that in all cases oral hearings must be given, or else the principles of natural justice are breached. A number of judgments have held that natural justice is a flexible tool that is used in order that a person or authority arrive at a just result. Such result can be arrived at in many cases without oral hearing but on written representations given by parties, after considering which, a decision is then arrived at. Indeed, in a recent judgment in Gorkha Security Services v. State (NCT of Delhi) [Gorkha Security Services v. State (NCT of Delhi), (2014) 9 SCC 105] this Court has held, in a blacklisting case, that where serious consequences ensue, once a show-
cause notice is issued and opportunity to reply is afforded, natural justice is satisfied and it is not necessary to give oral hearing in such cases (see para 20).
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16. When it comes to whether the borrower can, given the consequences of being declared a wilful defaulter, be said to have a right to be represented by a lawyer, the judgments of this Court have held that there is no such unconditional right, and that it would all depend on the facts and circumstances of each case, given the governing rules and the fact situation of each case. Thus, in Mohinder Singh Gill v. Chief Election Commr. [Mohinder Singh Gill v. Chief Election Commr., (1978) 1 SCC 405] , in the context of election law, this Court held: (SCC p. 439, para 63) "63. In Wiseman v. Borneman [Wiseman v. Borneman, 1968 Ch 429 : (1968) 2 WLR 320 : (1967) 3 All ER 1045 (CA)] there was a hint of the competitive claims of hurry and hearing. Lord Reid said: 'Even where the decision has to be reached by a body acting judicially, there must be a balance between the need for expedition and the need to give full opportunity to the defendant to see material against him' (emphasis added). We agree that the elaborate and sophisticated methodology of a formalised hearing may be injurious to promptitude so essential in an election under way. Even so, natural justice is pragmatically flexible and is amenable to capsulation under the compulsive pressure of circumstances. To burke it altogether may not be a stroke of fairness except in very exceptional circumstances. Even in Wiseman [Wiseman v. Borneman, 1971 AC 297 : (1969) 3 WLR 706 (HL)] where all that was sought to be done was to see if there was a prima Page 58 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined facie case to proceed with a tax case where, inevitably, a fuller hearing would be extended at a later stage of the proceedings, Lord Reid, Lord Morris of Borth-y-Gest and Lord Wilberforce suggested 'that there might be exceptional cases where to decide upon it ex parte would be unfair, and it would be the duty of the tribunal to take appropriate steps to eliminate unfairness' (Lord Denning, M.R., in Howard v. Borneman (2) [Howard v. Borneman (2), 1975 Ch 201 : (1974) 3 WLR 660 (CA)] summarised the observations of the Law Lords in this form). No doctrinaire approach is desirable but the court must be anxious to salvage the cardinal rule to the extent permissible in a given case. After all, it is not obligatory that counsel should be allowed to appear nor is it compulsory that oral evidence should be adduced. Indeed, it is not even imperative that written statements should be called for.
Disclosure of the prominent
circumstances and asking for an
immediate explanation orally or
otherwise may, in many cases, be
sufficient compliance. It is even
conceivable that an urgent meeting with the parties concerned summoned at an hour's notice, or in a crisis, even a telephone call, may suffice." (emphasis in original)
17. In Kavita v. State of Maharashtra (1) [Kavita v. State of Maharashtra (1), (1981) 3 SCC 558 : 1981 SCC (Cri) 743] (Kavita), this Court held, in the context of preventive detention, that even when a detenu makes a request for Page 59 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined legal assistance before the Advisory Board, the Advisory Board is vested with a discretion whether to allow or disallow such legal assistance. This was despite the fact that adequate legal assistance may be essential for the protection of the fundamental right to life and personal liberty guaranteed by Article 21 of the Constitution. On facts, it was held that since the detenu had not made any request to the Advisory Board for any such permission, the Court was not prepared to hold that the detenu was denied the assistance of counsel so as to lead to the conclusion that procedural fairness under Article 21 of the Constitution was denied to him. Likewise, in Nand Lal Bajaj v. State of Punjab [Nand Lal Bajaj v. State of Punjab, (1981) 4 SCC 327 : 1981 SCC (Cri) 841] , this Court referred to Article 22(3)(b) of the Constitution of India which states that the right to consult and be defended by a legal practitioner of his choice is denied to a person who is arrested or detained under any law providing for preventive detention. This Court then went on to hold that normally, lawyers have no place in proceedings before the Advisory Board, and then went on to refer to Kavita [Kavita v. State of Maharashtra (1), (1981) 3 SCC 558 : 1981 SCC (Cri) 743] . It was finally held that since the detaining authority was allowed to be represented by counsel before the Advisory Board, whereas the detenu was not, the order of detention would be quashed as this would be discriminatory.
18. In J.K. Aggarwal v. Haryana Seeds Development Corpn. Ltd. [J.K. Aggarwal Page 60 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined v. Haryana Seeds Development Corpn. Ltd., (1991) 2 SCC 283 : 1991 SCC (L&S) 483] , this Court, after discussing the case law, held in para 4, that the right of representation by a lawyer cannot be held to be a part of natural justice. No general principle valid in all cases can be enunciated. In the last analysis, a decision has to be reached on a case to case basis on situational particularities and the special requirements of justice of the case (see para 8).
19. In Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi [Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115 : 1993 SCC (L&S) 360] , this Court held that a workman under the Industrial Disputes Act, 1947 has no right, under principles of natural justice, that he must be represented by counsel. After discussing several judgments, this Court concluded:
(SCC pp. 126-27 & 129, paras 12-13 & 17) "12. From the above decisions of the English Courts it seems clear to us that the right to be represented by a counsel or agent of one's own choice is not an absolute right and can be controlled, restricted or regulated by law, rules or regulations. However, if the charge is of a serious and complex nature, the delinquent's request to be represented 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 Page 61 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined been ruled by this Court in (I) N. Kalindi v. Tata Locomotive & Engg. Co.
Ltd. [N. Kalindi v. Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914] , (ii) Brooke Bond (India) (P) Ltd. v. S. Subba Raman [Brooke Bond (India) (P) Ltd. v. S. Subba Raman, (1961) 2 LLJ 417 (SC)] and (iii) Dunlop Rubber Co. (India) Ltd. v. Workmen [Dunlop Rubber Co. (India) Ltd. v. Workmen, (1965) 2 SCR 139 : AIR 1965 SC 1392] that there is no right to representation as such unless the company by its Standing Orders recognises such a right.
***
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 Page 62 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined domestic enquiry is completed with despatch and is not prolonged endlessly. Secondly, when the person defending the delinquent is from the department or establishment in which the delinquent is working he would be well conversant with the working of that department and the relevant rules and would, therefore, be able to render satisfactory service to the delinquent. Thirdly, not only would the entire proceedings be completed quickly but also inexpensively. It is, therefore, not correct to contend that the Standing Order or Section 22(ii) of the Act conflicts with the principles of natural justice."
20. In Railway Protection Force v. K. Raghuram Babu [Railway Protection Force v. K. Raghuram Babu, (2008) 4 SCC 406 :
(2008) 1 SCC (L&S) 1043] , this Court, in the context of a domestic/departmental enquiry held: (SCC p. 408, paras 9-11) "9. It is well settled that ordinarily in a domestic/departmental enquiry the person accused of misconduct has to conduct his own case vide N. Kalindi v.
Tata Locomotive & Engg. Co. Ltd. [N. Kalindi v. Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914] Such an inquiry is not a suit or criminal trial where a party has a right to be represented by a lawyer. It is only if there is some rule which permits the accused to be represented by someone else, that he can claim to be so represented in an inquiry vide Brooke Bond (India) (P) Ltd. v. S. Subba Raman [Brooke Bond (India) (P) Ltd. v. S. Subba Raman, (1961) 2 LLJ 417 (SC)] . Page 63 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined
10. Similarly, in Cipla Ltd. v. Ripu Daman Bhanot [Cipla Ltd. v. Ripu Daman Bhanot, (1999) 4 SCC 188 : 1999 SCC (L&S) 847] it was held by this Court that representation could not be claimed as of right. This decision followed the earlier decision Bharat Petroleum Corpn. Ltd. v. Maharashtra General Kamgar Union [Bharat Petroleum Corpn. Ltd. v. Maharashtra General Kamgar Union, (1999) 1 SCC 626 : 1999 SCC (L&S) 361] in which the whole case law has been reviewed by this Court.
11. Following the above decision it has to be held that there is no vested or absolute right in any charge-sheeted employee to representation either through a counsel or through any other person unless the statute or rules/standing orders provide for such a right. Moreover, the right to representation through someone, even if granted by the rules, can be granted as a restricted or controlled right. Refusal to grant representation through an agent does not violate the principles of natural justice."
Ultimately, the Court upheld the validity of Rule 153.8 of the Railway Protection Force Rules, 1987, which permitted a friend to accompany a delinquent, who will not, however, be allowed to address the inquiry officer or be allowed to cross-examine witnesses.
21. It has also been argued before us that the present case, being a case where "wilful default" consists of facts which are known to the borrower, and as "wilful default" would only be the Page 64 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined borrower's version of facts, no lawyer is needed as no complicated questions of law need to be presented before the In- House Committees. Thus, in Krishna Chandra Tandon v. Union of India [Krishna Chandra Tandon v. Union of India, (1974) 4 SCC 374 : 1974 SCC (L&S) 329] , this Court held: (SCC p. 381, para 17) "17. It was next argued that the appellant had asked for the assistance of an advocate but the same was refused. It was submitted that having regard to the intricacies of the case and particularly the ill health of the appellant, he should have been given the assistance of an advocate, and since that was not given there was no reasonable opportunity to defend. The High Court has rejected this submission and we think for good reasons. The appellant was not entitled under the Rules to the assistance of an advocate during the course of the enquiry. The learned Judges were right in pointing out that all that the appellant had to do in the course of the enquiry was to defend the correctness of his assessment orders. Clear indications had been given in the charges with regard to the unusual conduct he displayed in disposing of the assessment cases and the various flaws and defaults which 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 Page 65 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined case where oral evidence was recorded with reference to accounts and the petitioner required the services of a trained lawyer for cross-examining the witnesses. There was no legal complexity in the case. We do not, therefore, accede to the contention that the absence of a lawyer deprived the appellant of a reasonable opportunity to defend himself."
22. Also, in National Seeds Corpn. Ltd. v. K.V. Rama Reddy [National Seeds Corpn. Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645 : (2007) 1 SCC (L&S) 512] , this Court laid down: (SCC p. 648, para
7) "7. The law in this country does not concede an absolute right of representation to an employee in domestic enquiries as part of his right to be heard and that there is no right to representation by somebody else unless the rules or regulation and standing orders, if any, regulating the conduct of disciplinary proceedings specifically recognise such a right and provide for such representation: see N. Kalindi v. Tata Locomotive & Engg. Co. Ltd. [N. Kalindi v. Tata Locomotive & Engg. Co. Ltd., (1960) 3 SCR 407 : AIR 1960 SC 914], Dunlop Rubber Co. (India) Ltd. v. Workmen [Dunlop Rubber Co. (India) Ltd. v. Workmen, (1965) 2 SCR 139 : AIR 1965 SC 1392],Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi [Crescent Dyes and Chemicals Ltd. v. Ram Naresh Tripathi, (1993) 2 SCC 115 : 1993 SCC (L&S) 360] and Indian Overseas Bank v. Officers' Assn. [Indian Page 66 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined Overseas Bank v. Officers' Assn., (2001) 9 SCC 540 : 2002 SCC (L&S) 1043] "
23. The Court then held: (National Seeds Corpn. Ltd. case [National Seeds Corpn. Ltd. v. K.V. Rama Reddy, (2006) 11 SCC 645 : (2007) 1 SCC (L&S) 512] , SCC pp. 650-51, para 10)
"10. Learned counsel for the appellant Corporation has brought to our notice office memorandum dated 21-11-2003 by which the prayer to engage a legal practitioner to act as a defence assistant was rejected. Reference was made to the Rules, though no specific reference has been made to the discretion available to be exercised in particular circumstances of a case. The same has to be noted in the background of the basis of prayer made for the purpose. The reasons indicated by the respondent for the purpose were: (a) amount alleged to have been misappropriated is Rs 63.67 lakhs, (b) a number of documents and number of witnesses are relied on by the respondent, and (c) the prayer for availing services of the retired employee has been rejected and the respondent is unable to get any assistance to get any other able co- worker. None of these factors are really relevant for the purpose of deciding as to whether he should be granted 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. Page 67 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined It has not been shown as to how a legal practitioner would be in a better position to assist the respondent so far as the documents in question are concerned. As a matter of fact, he would be in a better position to explain and throw light on the question of acceptability or otherwise and the relevance of the documents in question. The High Court [K.V. Rama Reddy v. National Seeds Corpn. Ltd., 2004 SCC OnLine Kar 654] has not considered these aspects and has been swayed by the fact that the respondent was physically handicapped person and the amount involved is very huge. As option to be assisted by another employee is given to the respondent, he was in no way prejudiced by the refusal to permit engagement of a legal practitioner. The High Court's order is, therefore, unsustainable and is set aside."
24. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 1- 7-2015, as it is clear that the events of wilful default as mentioned in Para 2.1.3 would only relate to the individual facts of each case. What has typically to be discovered is whether a unit has defaulted in making its payment 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 Page 68 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined available. Whether a default is intentional, deliberate, and calculated is again a question of fact which the lender may put to the borrower in a show-cause notice to elicit the borrower's submissions on the same. However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that Para 3 of the Master Circular dated 1-7-2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following Para 3(b) of the Revised Circular dated 1-7-2015, must give its order to the borrower as Page 69 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 1-7-2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised Circular dated 1- 7-2015. The impugned judgment [SBI v. Jah Developers (P) Ltd., LPA No. 113 of 2015 sub nom Punjab National Bank v. Kingfisher Airlines Ltd., 2015 SCC OnLine Del 14128 : (2016) 154 DRJ 164] [Kingfisher Airlines Ltd. v. Union of India, 2015 SCC OnLine Bom 6075 : (2016) 2 Mah LJ 838] is, therefore, set aside, and the appeals are allowed in terms of our judgment. We thank the learned Amicus Curiae, Shri Parag Tripathi, for his valuable assistance to this Court."
11. In view of the above conspectus of the law and undisputed facts of this case, it is apparent that the respondent bank has failed to comply with the aforesaid mechanism provided under the Revised Master Circular as petitioners were never informed by the Identification Committee by issuing show Page 70 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined cause notice and the notice was issued by the respondent bank to which the petitioners filed detailed reply but the order passed by the Identification Committee recording that the petitioners have committed willful default was never provided to the petitioners. The petitioners came to know about declaring them as willful defaulter only from the website.
12. It emerges from the record that the copy of the order passed by the Identification Committee was never supplied to the petitioners even though written request for the same was made by the petitioners. In view of the above facts and circumstances, the respondent bank while declaring the petitioners as willful defaulter has violated the provisions contained in the Revised Master Circular and has also acted in violation of principles of natural justice. Page 71 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023
NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined As the impugned action which is penal in nature has been taken causing serious implication to the petitioners without following the basis of principles of natural justice, the impugned action of the respondent bank identifying the account of the petitioners as willful default is liable to be quashed and set aside and the respondents are required to be restrained from reporting the name of the petitioners to the RBI/CIBIL as willful defaulters.
13. In view of the foregoing reasons, the petitions succeed and are accordingly allowed. The impugned action of the respondent bank identifying the account of the petitioners as willful defaulters is hereby quashed and set aside and the respondents are restrained from reporting the name of the petitioners to RBI/CIBIL as "Willful Defaulters". The matter is remanded Page 72 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023 NEUTRAL CITATION C/SCA/10803/2022 JUDGMENT DATED: 22/02/2023 undefined back to the Identification Committee of the respondent bank to follow the procedure as prescribed in Master Circular dated 1st July, 2015 by issuing a show cause notice to the petitioners and providing opportunity to the petitioners as per Clause-3 of the said circular. Such exercise by the Identification Committee and thereafter by the Review Committee shall be completed within the period of six months from the date of receipt of this order.
14. Rule is made absolute to the aforesaid extent. No order as to costs.
(BHARGAV D. KARIA, J) RAGHUNATH R NAIR Page 73 of 73 Downloaded on : Sun Sep 17 22:05:59 IST 2023