2020 (9) TMI 1177 - HC - Insolvency and Bankruptcy

Wilful Defaulter - Reserve Bank's Master Circular on wilful default published on July 1, 2015 - funds diverted by its promoters for purposes other than for which the credit facilities had been accorded - HELD THAT - On a meaningful reading of the relevant Master Circular, it is evident that any juristic entity can be labelled as a wilful defaulter though the mens rea element of the wilfulness of the default has, per force, to fasten onto some human agency. In other words, the human agencies in control of an inanimate juristic entity have to be found guilty of wilful default within the meaning of such expression as used in the Master Circular for the penal measures to attach to the juristic entity in default and also to the human agencies found responsible for the wilful default - There could be myriad situations covered by the Master Circular and the finding of wilful default. There could be a case where credit facilities were granted without any securities being obtained or personal guarantees being sought. In such a case, even though the human agencies responsible for the actions of the inanimate juristic entity may be found to be in wilful default along with the juristic entity, that is, the borrower, no independent financial obligation would fasten to the human agencies since they may not have extended any guarantee or created any mortgage of their personal properties. In the present case, since no personal guarantee was furnished by any of the writ petitioners, the moment the money due to Axis Bank was paid in full or was agreed to be received by way of a compromise, the writ petitioners stood rid of their burden as wilful defaulters and their names were liable to be removed from the relevant list. If, however, the writ petitioners continued in their capacity as guarantors in respect of the relevant transactions, the writ petitioners would have continued to be liable till the entire debt was discharged. But as the writ petitioners did not have any personal liability, the moment the resolution was approved and Axis Bank received the payment or is deemed to have received the payment, the names of the petitioners ought to have been taken off the list of wilful defaulters. As a consequence, the moment the writ petitioners were entitled to have their names removed from the list, the first sentence in the relevant sub- clause would not apply. Though the Reserve Bank has appeared at a belated stage, it has appropriately indicated the position in terms of its Master Circular of July 1, 2015. Accordingly, the Reserve Bank should take immediate steps to ensure that the names of the writ petitioners are removed from the list of wilful defaulters and the deletion will take effect from February 28, 2019. Appeal disposed off.

Summary

Issues Involved:
1. Applicability of the Reserve Bank's Master Circular on wilful default.
2. Finality of the finding of wilful default.
3. Impact of the insolvency proceedings and sale of the company on the wilful defaulter status.
4. Review Committee's decision on the wilful defaulter status post-sale.
5. Single Bench's order regarding the wilful defaulter status of the promoters.
6. Removal of names from the list of wilful defaulters.

Issue-wise Detailed Analysis:

1. Applicability of the Reserve Bank's Master Circular on wilful default:
The case revolves around the Reserve Bank's Master Circular on wilful default, specifically the edition published on July 1, 2015. The Master Circular outlines the criteria and penal measures for identifying and dealing with wilful defaulters. The relevant clause for this case is sub-clause (a) of clause 2.5, which stipulates that no additional facilities should be granted to listed wilful defaulters and debarment from institutional finance for a period of five years.

2. Finality of the finding of wilful default:
The ultimate finding that the company and its promoters were wilful defaulters attained finality. This was confirmed by a Division Bench order of the High Court, which was upheld by the Supreme Court. The Supreme Court's order allowed the writ petitioners to make a representation to the Review Committee of Axis Bank regarding their continued classification as wilful defaulters in light of subsequent events, specifically the sale of the company in insolvency proceedings.

3. Impact of the insolvency proceedings and sale of the company on the wilful defaulter status:
The company, Pro Minerals Pvt. Ltd., was sold to new promoters during insolvency proceedings before the National Company Law Tribunal (NCLT). The Supreme Court noted that the assets of the company had been sold in liquidation of its debts. The Review Committee of Axis Bank was tasked with deciding whether the subsequent sale of the company affected the wilful defaulter status of the writ petitioners.

4. Review Committee's decision on the wilful defaulter status post-sale:
The Review Committee of Axis Bank, following the Supreme Court's directive, did not permit the reopening of matters that had attained finality. It only considered the impact of the company's sale on the wilful defaulter status. The Review Committee concluded that despite the sale, the writ petitioners continued to be regarded as wilful defaulters under the Master Circular of July 1, 2015.

5. Single Bench's order regarding the wilful defaulter status of the promoters:
The Single Bench upheld the Review Committee's decision not to reopen concluded matters. However, it opined that since the writ petitioners had been divested of their control over and association with the company, they ceased to be wilful defaulters. This view was challenged in the appeals.

6. Removal of names from the list of wilful defaulters:
The Court noted that the Master Circular was somewhat unclear on how a wilful defaulter could have their name removed from the list. It was determined that since the writ petitioners had no personal guarantee or property as security, their names should have been removed from the list once the debt was settled through the resolution plan approved by NCLT. The Court concluded that the writ petitioners' names should be deemed removed from the list of wilful defaulters effective March 1, 2019. However, the prohibition on obtaining new commercial finance would continue for five years from February 28, 2019.

Conclusion:
The appeals were disposed of by modifying the order under appeal. The Reserve Bank was directed to ensure the removal of the writ petitioners' names from the list of wilful defaulters effective February 28, 2019. There were no orders as to costs.