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2021 (12) TMI 1485 - HC - Insolvency and BankruptcyWilful Defaulters - petitioners are unable to defend themselves as they are not aware about the reasons for such declaration (of wilful defaulters) - opportunity of hearing not provided to the petitioners - violation of principles of natural justice - HELD THAT - 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. The Apex Court in case of STATE BANK OF INDIA VERSUS M/S. JAH DEVELOPERS PVT. LTD. ORS. 2019 (5) TMI 862 - SUPREME COURT 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 interest, must be construed reasonably. 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 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 of CIBIL - 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. 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 and subsequent reporting of name of the petitioners to the RBI/CIBIL as willful defaulters are liable to be quashed and set aside. The impugned action of the respondent bank identifying the account of the petitioners as willful defaulters and subsequent reporting of the names of the petitioners to RBI/CIBIL as willful defaulters is hereby quashed and set aside and the matter is remanded 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. Petition allowed by way of remand.
Issues Involved:
1. Violation of principles of natural justice. 2. Procedural irregularities in declaring the petitioners as willful defaulters. 3. Non-compliance with the RBI Master Circular dated 1st July, 2015. 4. Failure to provide a copy of the Identification Committee's order. 5. Right to personal hearing and representation. Issue-wise Detailed Analysis: 1. Violation of principles of natural justice: The petitioners argued that they were not provided with the orders passed by the Identification Committee and the Review Committee, which declared their accounts as willful defaulters. This lack of communication prevented them from defending themselves as they were unaware of the reasons for such a declaration. The court noted that the principles of natural justice were violated as the petitioners were not given an opportunity for a personal hearing, nor were they informed about the reasons for being declared willful defaulters. 2. Procedural irregularities in declaring the petitioners as willful defaulters: The petitioners contended that the Identification Committee did not issue a show cause notice as required under Clause 3(b) of the RBI Circular. Instead, the respondent bank issued the notice, which is against the prescribed procedure. The court emphasized that the Identification Committee must issue the show cause notice and provide an opportunity for personal hearing before declaring anyone as a willful defaulter. The court found that the procedural requirements were not met, as the petitioners were not given a fair chance to present their case. 3. Non-compliance with the RBI Master Circular dated 1st July, 2015: The court referred to various clauses of the RBI Master Circular, which outline the definition of willful default, the mechanism for identification, and the penal measures. The court noted that the Identification Committee is required to examine evidence, issue a show cause notice, and provide reasons for declaring a borrower as a willful defaulter. The court found that the respondent bank did not follow these procedures, leading to a violation of the Master Circular. 4. Failure to provide a copy of the Identification Committee's order: The petitioners highlighted that they were not provided with a copy of the order passed by the Identification Committee, despite making written requests. The court observed that the failure to supply the order prevented the petitioners from understanding the reasons for their classification as willful defaulters. The court held that the bank's stance of not providing the order was unsustainable and contributed to the violation of natural justice. 5. Right to personal hearing and representation: The petitioners argued that they were denied the opportunity for a personal hearing and the assistance of professionals, which is crucial for defending against serious allegations. The court referred to precedents and the RBI Circular, which mandate that an opportunity for personal hearing should be provided if deemed necessary by the Identification Committee. The court found that the petitioners were not granted this opportunity, further violating the principles of natural justice. Conclusion: The court concluded that the respondent bank failed to comply with the procedural requirements and principles of natural justice as outlined in the RBI Master Circular. The court quashed the impugned actions of the respondent bank, which identified the petitioners as willful defaulters and reported their names to RBI/CIBIL. The matter was remanded back to the Identification Committee to follow the prescribed procedure, including issuing a show cause notice and providing an opportunity for personal hearing. The entire process was directed to be completed within six months.
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