2019 (1) TMI 2045 - HC - Indian Laws

Wilful defaulters - diversion of funds - challenge to decision of the Review Committee of Axis Bank Ltd. constituted under Clause 3(c) of the Master Circular on wilful defaulters issued by the Reserve Bank of India on 1st July, 2015 - HELD THAT - It will appear from Clause 2.5 (a) wherein the company and their entrepreneurs/promoters have been included, clearly demonstrate that the entrepreneurs and promoters of the company were intended to be brought within the ambit of wilful defaulters for the defaults of the company so that an entrepreneur or a promoter of a company engaged in acts which constitute wilful default are punished for the acts of the company. This is simply because the company does not function of itself but functions through a Board of Directors. The decision of the said company to divert funds was taken by its Board. The diversion of funds took place when the appellants were in the Board of the said company. The act of such diversion binds the appellants being entrepreneur/promoter who has a role in the decision making process of the company. In the instant case, the appellants were the directors of the company at the relevant point of time when the diversion of fund took place. In fact, they were also directors when the company committed default and was declared NPA. Measures under SARFAESI Act were also taken against the company when they were in control and management. The company has failed to establish that it did not have the capacity to honour the obligations. The appellants have also not been able to discharge by adducing documentary evidence or otherwise that they were not even remotely connected with the acts of default and diversion of funds made by the company - Pre-loan negotiations were made through the appellants. The banks definitely relied upon the credibility of the appellants at the time of sanctioning the loan. The acts of the appellants while in the decision making process of the company has shattered the confidence of the banks which they had at the time of disbursing the loan. The appellants were personally heard and their submissions were duly recorded. The diversion is admitted and the default of the said company is an admitted fact. The appellants being in control and management of the said company, therefore, cannot shirk their responsibility as to the default on the part of the said company. There are no reasons to interfere with the orders impugned in the two appeals - appeal dismissed.

Summary

Issues Involved:
1. Challenge to the decision of the Review Committee of Axis Bank Ltd. under Clause 3(c) of the Master Circular on wilful defaulters issued by the Reserve Bank of India.
2. Allegations of violation of principles of natural justice.
3. Consideration of whether the review committee exceeded its jurisdiction.
4. Evaluation of the appellants' involvement in the company's financial decisions and defaults.

Issue-Wise Detailed Analysis:

1. Challenge to the decision of the Review Committee of Axis Bank Ltd. under Clause 3(c) of the Master Circular on wilful defaulters issued by the Reserve Bank of India:
The appellants, Gaurav Dalmia and Raghu Hari Dalmia, challenged the decision of the Review Committee constituted by Axis Bank under Clause 3(c) of the Master Circular on wilful defaulters issued by the Reserve Bank of India. The company, Pro Minerals Pvt. Ltd., availed financial assistance from a consortium of banks led by Bank of Baroda. The company diverted funds meant for a Captive Power Plant (CPP) to other uses, which was admitted. The company's account was declared Non-Performing Asset (NPA) after failing to repay the loan. Axis Bank issued notices and ultimately declared the company and its directors as wilful defaulters.

2. Allegations of violation of principles of natural justice:
The appellants contended that they were declared wilful defaulters without a statutory notice of show cause or appropriate opportunity for hearing, as mandated by the Reserve Bank of India. They argued that the review committee's decision was based on a single incident of fund diversion, which should not have led to such a harsh penalty. The court, however, found that the appellants were given opportunities to present their case and that the review committee adhered to the Master Circular's provisions, including personal hearings and recording submissions.

3. Consideration of whether the review committee exceeded its jurisdiction:
The appellants argued that the review committee exceeded its jurisdiction by expanding the findings beyond the show-cause notice and the identification committee's order. They claimed that the review committee added words and findings that were not present in the original documents. The court concluded that the review committee acted within its jurisdiction, providing independent findings and confirming the identification of wilful defaulters based on the chain of events and the appellants' involvement in the company's financial decisions.

4. Evaluation of the appellants' involvement in the company's financial decisions and defaults:
The court examined the appellants' roles as directors during the fund diversion and default periods. The appellants admitted to the fund diversion but claimed they were non-executive directors and not involved in day-to-day operations. The court found that the appellants were part of the decision-making process and could not escape responsibility for the company's actions. The Master Circular intended to hold entrepreneurs and promoters accountable for wilful defaults by their companies. The court noted that the appellants' track record and involvement in pre-loan negotiations were factors in the banks' decision to grant loans, and their actions led to a loss of confidence by the banks.

Conclusion:
The court dismissed the appeals, finding no reason to interfere with the review committee's decision. The appellants were held responsible for the company's wilful default, and the review committee's actions were deemed consistent with the Master Circular and principles of natural justice. The appeals and connected applications were dismissed without any order as to costs.