2022 (6) TMI 136 - HC - Indian Laws

Wilful defaulters - declaration by a Bank based on a Master circular dated 01.07.2013 issued by the Reserve Bank of India - invocation of extraordinary jurisdiction under Article 226 of the Constitution of India - HELD THAT - On a perusal of the clauses in the Master Circular, it can be understood that the impact of declaring a person as a wilful default is drastic and may even have a tendency to impact the fundamental rights of a citizen. Though the learned counsel for petitioners questioned the validity of the Master Circular conferring power upon the banks to declare a person as wilful defaulter, since such a pleading is absent, this Court refrains from considering the said contention. Whether the Reserve Bank of India is vested with powers to confer the banks with authority to declare a person as wilful defaulter or not and whether those are reasonable restrictions are issues that are therefore kept open for consideration, in an appropriate case. In the decision in STATE BANK OF INDIA VERSUS M/S. JAH DEVELOPERS PVT. LTD. ORS. 2019 (5) TMI 862 - SUPREME COURT , while considering the question as to whether a person is entitled to have a right to be represented by an Advocate before the Committees, it was held that the COE and the Review Committee are only in-house Committees which are purely administrative in nature, not vested with any judicial powers - the Supreme Court also reveals that the decision of the COE ought to be given to the borrower, as soon as it is made and thereafter an opportunity is to be given to the borrower to represent against the said decision, based on which the Review Committee must pass a reasoned order. The order of the Review Committee must also be given to the borrower. Apart from the above, a perusal of the Master Circular reveals that the COE must consider the explanation submitted by the borrower and give reasons for recording the fact of wilful default. With the aforesaid salient features of the Master Circular, when this Court appreciate the contentions raised by the learned counsel for the petitioners, it grabs the immediate attention that the impugned orders Ext.P19 and Ext.P21 fails to satisfy the safeguards provided in the Master Circular. In the absence of serving the order of COE on the petitioners, there could never have been a declaration of the petitioners as wilful defaulters since the Master Circular as directed by the Supreme Court contemplates declaration as wilful defaulter only after serving the copy of the order of COE and the consequent decision of the Review Committee. The procedure adopted by the 4th respondent while declaring the petitioners as wilful defaulters has thus failed to grant an opportunity to represent on law and on facts against the decision of the COE - this Court is of the considered view that the process by which petitioners have been declared as wilful defaulters is perverse and contrary to the Master Circular of the Reserve Bank of India apart from conflicting with the peremptory directions of the Supreme Court in State Bank of India v. M/s.Jah Developers Pvt. Ltd. and Ors. This Court notices the total lack of application of mind in the order of COE. There is also a manifest failure to consider the explanation offered by the borrower/ guarantors. The only reason mentioned in Ext.R4(d) under the column 'latest developments' is a failure of the firm to settle the account and the request for grant of additional working capital limits - the question relating to the constitution of the Review Committee is not required to be considered. Petition allowed.

Summary

Issues Involved:
1. Validity of the declaration of petitioners as wilful defaulters.
2. Compliance with the Reserve Bank of India (RBI) Master Circular guidelines.
3. Adherence to principles of natural justice.
4. Proper constitution and functioning of the Committees involved.
5. Legal consequences of being declared a wilful defaulter.

Issue-wise Detailed Analysis:

1. Validity of the Declaration of Petitioners as Wilful Defaulters:
The petitioners challenged their declaration as wilful defaulters by a bank, invoking Article 226 of the Constitution of India. The petitioners argued that the declaration had no statutory backing and infringed their legal rights. The court noted that the Reserve Bank of India (RBI) Master Circular defines a wilful defaulter and outlines the mechanism for identification. The court found that the bank failed to follow the required procedures, including serving the order of the Committee of Executives (COE) to the petitioners, which is a prerequisite for declaring someone a wilful defaulter.

2. Compliance with the Reserve Bank of India (RBI) Master Circular Guidelines:
The court examined the RBI Master Circulars of 2013 and 2015, which provide detailed guidelines for identifying wilful defaulters. The Master Circular stipulates that the identification should be based on the borrower's track record and not on isolated incidents, and the default must be intentional, deliberate, and calculated. The court observed that the bank did not comply with these guidelines, particularly by not serving the COE's order to the petitioners, which is essential for enabling them to make a representation against the decision.

3. Adherence to Principles of Natural Justice:
The court emphasized the importance of natural justice, which requires that the borrower be given a fair opportunity to present their case. The Supreme Court in State Bank of India v. M/s. Jah Developers Pvt. Ltd. and Ors. [AIR 2019 SC 2854] had mandated that the COE's order must be given to the borrower, and the borrower should have the opportunity to represent against it before the Review Committee. The court found that the bank's failure to serve the COE's order directly to the petitioners violated these principles, rendering the declaration process flawed.

4. Proper Constitution and Functioning of the Committees Involved:
The petitioners contended that the Committees were not properly constituted as per the Master Circular. The court did not delve deeply into this issue as the primary contention regarding the non-service of the COE's order was sufficient to quash the declarations. However, the court noted that the Review Committee also failed to independently assess the COE's order and consider the petitioners' explanations.

5. Legal Consequences of Being Declared a Wilful Defaulter:
The court acknowledged the severe consequences of being declared a wilful defaulter, which include barring from institutional finance and potential criminal proceedings. The court reiterated that such drastic measures must be taken with strict adherence to procedural safeguards to prevent arbitrary actions by banks. The court highlighted that the COE and Review Committee must follow the guidelines and ensure that the borrower's rights are protected.

Conclusion:
The court quashed the communications declaring the petitioners as wilful defaulters due to non-compliance with the RBI Master Circular and the principles of natural justice. The court granted the bank liberty to reconsider the case afresh, following the proper procedures and guidelines. The writ petition was allowed, providing relief to the petitioners from the impugned declarations.