2018 (7) TMI 1909 - HC - Indian Laws

Wilful Defaulter - failure to make repayment of outstanding dues of the Bank - Master Circular on Willful Defaulter dated 1 st July 2018 - principles of natural justice - Held that - 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. Examining the present matter on the touch stone of the aforesaid provisions we find that the Respondent Bank has failed to comply with the aforesaid mechanism provided under the Master Circular - 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 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. The impugned orders by which the Petitioners have been declared wilful defaulter has been set aside - However the Respondents are at liberty to take fresh steps against the Petitioners if they are so advised - petition allowed.

Summary

Issues Involved:
1. Declaration of Petitioners as "Willful Defaulter" by the Bank.
2. Compliance with RBI Guidelines and principles of natural justice.
3. Necessity of providing a copy of the Identification Committee's order to the Petitioners.
4. Validity of the Review Committee's order.

Issue-wise Detailed Analysis:

1. Declaration of Petitioners as "Willful Defaulter" by the Bank:
The Petitioners, engaged in the business of selling and purchasing Tata Vehicles, availed credit facilities from the Respondent Bank. Due to unavoidable circumstances, they failed to repay the outstanding dues, leading the Bank to issue a notice on 16th November 2017, demanding payment of ?2,62,28,830/-. Subsequently, the Bank initiated proceedings before the Debt Recovery Tribunal (D.R.T.). During the pendency of the matter, the Bank's Chief Manager issued a show cause notice on 29th December 2017, intending to declare the Petitioners as "Willful Defaulters." The Petitioners replied on 29th January 2018, arguing against the declaration and requesting a personal hearing. However, the Identification Committee declared them "Willful Defaulters" on 9th March 2018 without considering their reply or granting a hearing. This decision was confirmed by the Review Committee on 20th April 2018, prompting the Petitioners to file this Petition under Article 226 of the Constitution of India.

2. Compliance with RBI Guidelines and principles of natural justice:
The Petitioners contended that the orders of the Identification and Review Committees violated the RBI Master Circular dated 1st July 2015 and principles of natural justice. The Circular mandates issuing a show cause notice, considering submissions, and providing reasons for declaring a borrower as a willful defaulter. Additionally, it requires an opportunity for a personal hearing if deemed necessary by the Identification Committee. The Petitioners argued that these procedural requirements were not fulfilled, rendering the orders invalid. The Review Committee's order was also criticized for lacking reasons and being a non-speaking order.

3. Necessity of providing a copy of the Identification Committee's order to the Petitioners:
The Petitioners claimed they were not provided with a copy of the Identification Committee's order despite requesting it on 15th June 2018. The Respondents argued that supplying the order was unnecessary as the Review Committee's order was served. However, the Court emphasized that the Identification Committee must record reasons and provide the order to ensure transparency and compliance with natural justice principles. The absence of the order hindered the Petitioners' ability to understand the reasons for the decision and denied them a fair opportunity to contest it.

4. Validity of the Review Committee's order:
The Court scrutinized the Review Committee's order and found it to be a non-speaking order, lacking detailed reasons for confirming the Identification Committee's decision. The Review Committee merely stated that the Petitioners defaulted in meeting payment obligations despite having the capacity to repay. The Court held that such an order could not be sustained as it failed to provide a rationale for the decision, violating the principles of natural justice and good administration.

Conclusion:
The Court concluded that the Respondent Bank violated the RBI Master Circular and principles of natural justice by not providing the Identification Committee's order and failing to give reasons for declaring the Petitioners as willful defaulters. The Review Committee's order was also deemed invalid due to the absence of reasons. Consequently, the Court set aside the impugned orders and granted the Respondents liberty to initiate fresh proceedings against the Petitioners in compliance with the RBI guidelines and principles of natural justice. The Petition was allowed accordingly.