2021 (7) TMI 1309 - HC - Companies Law

Wilful Defaulter - Default in meeting payment/repayment obligations to the Bank, even though they had the capacity - diversion of funds - petitioners have siphoned off funds without using the same for the purpose of which funds were availed - HELD THAT - A Writ Court cannot go into weigh the sufficiency of reasons given by an administrative or quasi judicial authority. What is seen, is whether there are some reasons, however small, in support of the findings. This is so as it is only a bank and the lender, given their special relations that can assess whether any default on the part of a borrower is wilful or not. A writ Court does not possess such expertise. The writ petitioners have not been able to demonstrate as to how they have been prejudiced by any of the alleged acts or omissions on the part of the respondent. Assuming for the sake of argument that there is some infraction of procedure on the part of the bank (although the Court does not find any) it is now well settled that every infraction of the principle of natural justice would not ipso facto vitiate proceedings. The petitioner must be able to demonstrate clearly the prejudice suffered by the reason of such infraction. Hence even if one accepts the submission of Mr. Saha that there has been some minor infractions of natural justice or procedure, no prejudice appears to have been caused to the petitioners, by such infraction - Although not pressed in course of arguments it has been pleaded in the writ petition that the bank has instituted proceedings under Section 7 of the IBC, 2016. It is submitted that declaring the writ petitioners as Wilful Defaulters would deprive the petitioners of Rights under Section 32 A of the IBC. It is argued that the impugned orders under Master Circular, 2015 would entail penal consequence on the petitioners and are in derogation of the proceedings under and the provisions of the IBC, 2016. The petitioners even otherwise are not entitled to benefit of Section 32A, since no resolution plan has been sanctioned as yet by the NCLT and even if a resolution plan was approved, the petitioners cannot avail the benefits of Section 32A for being promoters and consequently being persons in default under Section 32 A read with Section 2(60) of the Companies Act, 2013. Clause 4.3 of the Master Circular states is that there is scope even under the exiting legislations to initiate criminal action against wilful defaulters depending upon the facts and circumstances of the case under the provisions of Sections 403 and 415 of the Penal Code, 1860 and the banks and financial institutions are strictly advised to seriously and promptly consider initiating criminal action based on the facts and circumstances of each case under the provisions of IPC. Thus, the Master Circular by itself does not have penal consequences, whereas Sections 403 and 415 IPC have penal consequences. The writ petition must fail and is hereby dismissed.

Summary

Issues Involved:
1. Declaration of petitioners as Wilful Defaulters.
2. Alleged procedural lapses by the Wilful Defaulter Identification Committee (WDIC).
3. Denial of personal hearing.
4. Validity of the Review Committee's confirmation of the WDIC's decision.
5. Prejudice caused to petitioners by procedural infractions.
6. Impact of proceedings under the Insolvency and Bankruptcy Code (IBC), 2016.
7. Publication of photographs of the petitioners.

Detailed Analysis:

1. Declaration of Petitioners as Wilful Defaulters:
The petitioners were declared Wilful Defaulters based on the grounds that they defaulted on payment obligations despite having the capacity, diverted funds for purposes other than intended, utilized short-term working capital for long-term purposes, made unauthorized investments in other companies, and siphoned off funds. The evidence relied upon included the audited Balance Sheets of the principal debtor for the years ending 31st March 2016, 2017, and 2018.

2. Alleged Procedural Lapses by the WDIC:
The petitioners argued that they were not furnished with the documents relied upon by the WDIC, depriving them of the opportunity to defend themselves. The court found that the show cause notice itself referred to the audited Balance Sheets, which are public documents and/or the petitioners' own documents. Therefore, the repeated requests for documents were deemed not bona fide, and the argument was not sustained.

3. Denial of Personal Hearing:
The petitioners contended that they were wrongfully denied a personal hearing, as they could not attend the hearing at the bank's branch due to the pandemic. The court held that personal hearing is not mandated by the Supreme Court or the Master Circular, and the petitioners had been allowed to represent against the show cause notice. The offer for a personal hearing at the bank's office was not availed by the petitioners, and thus, the argument was not sustained.

4. Validity of the Review Committee's Confirmation:
The petitioners argued that the Review Committee did not provide detailed reasons while confirming the WDIC's order. The court referred to the principles of administrative law, stating that when a confirming authority agrees with the findings of the initial committee, it need not provide separate reasons. The court found that the Review Committee's confirmation was valid and the argument was rejected.

5. Prejudice Caused to Petitioners by Procedural Infractions:
The court held that the petitioners failed to demonstrate how they were prejudiced by any alleged procedural infractions. It was noted that every infraction of natural justice does not ipso facto vitiate proceedings unless clear prejudice is demonstrated. The petitioners' argument on this score was not sustained.

6. Impact of Proceedings under the IBC, 2016:
The petitioners argued that being declared Wilful Defaulters would deprive them of rights under Section 32A of the IBC. The court referred to the Supreme Court's decision in Manish Kumar vs. Union of India, which clarified that the benefits of Section 32A are not available to every promoter and guarantor. The petitioners, being promoters, were not entitled to these benefits, and the argument was rejected.

7. Publication of Photographs of the Petitioners:
The petitioners contended that the publication of their photographs in newspapers was unwarranted. The court referred to the Master Circular and previous judgments, noting that publication can be done in exceptional circumstances. The court did not find sufficient grounds to quash the decision to publish the photographs.

Conclusion:
The court dismissed the writ petition, finding no merit in the petitioners' arguments. The procedural actions of the WDIC and the Review Committee were upheld, and the declaration of the petitioners as Wilful Defaulters was confirmed. The court also rejected the petitioners' request for a stay of the judgment's operation.