2024 (2) TMI 1451 - HC - Companies Law

Wilful defaulter - resignation from a company per se - validity of an event of Wilful Default under Master Circular - as argued Petitioner resigned as the Executive Director of MBSL and Form-32 to that effect was filed with the Registrar of Companies ( RoC ) - Satisfaction to issue Show Cause Notice in the instant case - HELD THAT - Under the Master Circular, to declare a person as a Wilful Defaulter, lender banks have to independently find that the Wilful Default is intentional, deliberate and calculated and the said conclusion must be based on objective facts and circumstances of the case . The Forensic Audit Report can act as a piece of corroboration for the said exercise, but not the sole basis. The lender banks must record their satisfaction of commission of Wilful Default which according to them are intentional, deliberate and calculated . Under Clause 2.1.3 of the Master Circular, the lender banks have to keep in mind the track record of the borrower. The decision to declare an entity or person as Wilful Defaulter cannot be taken on the basis of isolated transactions/incidents. A similar obligation is cast on lender banks in Clause 2.5 of the Master Circular, which require the lender banks to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It is required to be ensured that solitary or isolated instances are not made the basis for imposing the penal action under the Master Circular. In the present case, the satisfaction to issue Show Cause Notice, does not appear to have been recorded in accordance with the requirements of the Master Circular. Keeping the object of the Master Circular in mind and the consequences that it entails, both civil and penal, the lender banks have an obligation to comply with the inbuilt safeguards in the Master Circular. Lest, the line between persons who commit mere default in repayment of loan obligations and those who commit Wilful Default in terms of the Master Circular, would get obliterated. Whether the Petitioner committed acts of Wilful Default? - Under the Master Circular, a lender bank has to record a finding of an act of Default to be Wilful if the same is intentional, deliberate and calculated on objective assessment of facts and circumstances. However, the said burden is not discharged by merely quoting the Forensic Audit Report, which itself has not drawn any conclusion of diversion of funds. In the meeting held on 27.5.2014, the lender banks agreed to reduce the collateral security of Rs. 33 Crores to Rs. 25.53 Crores in lieu of the Petitioner s personal guarantee. The Petitioner did not furnish his personal guarantee for the CDR package nor did he participate in any of the deliberations for the approval of the CDR package. The lender banks still approved the CDR package and acted upon it without the presence and personal guarantee of the Petitioner. The lender banks, therefore, tacitly acquiesced to the Petitioner s exit from MBSL and approved the CDR package of MBSL without his presence in any capacity or personal guarantee. In this view of the matter, it is not open for the lender banks to contend that when MBSL was about to default in its repayment obligations, the Petitioner made an easy escape. In any case, resignation from a company per se is not an act of Wilful Default under the Master Circular. Effect of Forensic Audit Report - The nature of Forensic Audit Report in respect of a company is discussed by the Calcutta High Court in Prashant Bothra Anr. v. Bureau of Immigration ORs 2023 (9) TMI 702 - CALCUTTA HIGH COURT It was held that a Forensic Audit Report, at best, is a piece of evidence in liquidation proceedings and is in no manner a conclusive proof of any illegality committed under a law. The Forensic Audit Report is merely an opinion of the author, which is based on several disclaimers. The Forensic Audit Report cannot be conclusive proof of its observations. Even under the Indian Evidence Act, 1872, the opinion of an expert witness under Section 45 is not a conclusive proof. It is subject to cross examination and the opinion and conclusions of an expert are subject to challenge. The lender banks must follow the mandate of Clause 2.1.3 read with Clause 2.5 of the Master Circular and independently find acts of Wilful Default which are intentional, deliberate and calculated and the said conclusion should be based on objective facts and circumstances of the case . Any other view would lead to consequences where mere cases of default would be categorised as acts of Wilful Default under the Master Circular. The Master Circular is not to be invoked in every case of default but only when the default is Wilful Default as construed under the scheme of the Master Circular. Identification of Wilful Default has to be made keeping in view the track record of the borrower and not on the basis of isolated transactions/incidents - In the Flash Report, it is noted that MBSL could service all its debts till 30.11.2011 and even repaid the principal sum of the term loans. The aforesaid position, which is accepted by the lender banks in their own document i.e., the FRS, does not show a consistent negative track record of MBSL. MBSL was seen as a global player in photovoltaic cells. It had presence in several countries. It had serviced its debt and largely repaid the principal dues. The Respondent Bank, under Clause 2.1.3 read with Clause 2.5 of the Master Circular, was obligated to reflect upon the entire track record of MBSL and then conclude whether there existed events of Wilful Default and not on the basis of isolated transactions/incidents. Consequences of admitting MBSL for CDR under the CDR Scheme - This Court is of the view that it is incumbent upon banks who are dealing with public funds and discharging a public duty to make appropriate enquiries as to whether a borrower is in genuine financial difficulty or whether there exists events of fraud and malfeasance. If the lender banks find fraud or malfeasance, the CDR-EG must either refuse CDR completely or impose such additional onerous conditions as provided in the CDR Scheme itself. In the present case, the lender banks were fully aware of all the transactions, which are now alleged to be acts of Wilful Default. This fact is part of the documents leading to the finalization of the CDR scheme. Despite noting all transactions, financial statements, balance sheets, TEV Report and Stock Audit Report, the lender banks placed MBSL in Class-B of CDR Master Circular which cannot be assigned if there is diversion of funds. They found no occasion to order a forensic audit of MBIL before finalization of CDR scheme. The lender banks, therefore, never treated the alleged acts of Wilful Default as an act of diversion or siphoning either during finalization of CDR scheme or after its failure. It may not be open for lender banks to classify known acts as events of Wilful Default merely because subsequently, in respect of the same known acts, the Forensic Audit Report has made certain observations. To declare a person as a Wilful Defaulter, lender banks have to independently find that the Wilful Default is intentional, deliberate and calculated and the said conclusion is based on objective facts and circumstances of the case , as required under the Master Circular. The Forensic Audit Report, at best, can act as a piece of corroboration for the said exercise, but not the sole basis. To take any other view would entail the transfer of jurisdiction to determine acts of Wilful Default to Forensic Auditors, which by law under the Master Circular is vested in the Identification Committee and Review Committee of the Respondent Bank. When a law requires a particular act to be done in a particular manner, then it has to be done in that manner alone and no other. See Tata Chemicals Ltd. v. Commr. of Customs 2015 (5) TMI 557 - SUPREME COURT and Krishna Rai v. Banaras Hindu University 2022 (6) TMI 1436 - SUPREME COURT Thus orde passed by the Review Committee, confirming the Petitioner as Wilful Defaulter under the Master Circular, are unsustainable and the impugned order is accordingly, quashed and set aside.

Summary

Issues Involved:
1. Validity of declaring the Petitioner as a Wilful Defaulter under the RBI's Master Circular.
2. Examination of the standards and procedures for declaring a person as a Wilful Defaulter.
3. Analysis of the Forensic Audit Report as a basis for declaring Wilful Default.
4. Impact of the Corporate Debt Restructuring (CDR) scheme on the declaration of Wilful Default.
5. Consideration of the track record of the borrower in the context of Wilful Default.

Detailed Analysis:

1. Validity of Declaring the Petitioner as a Wilful Defaulter:
The Petitioner challenged the Respondent Bank's decision to declare him a Wilful Defaulter under the RBI's Master Circular. The declaration was based on allegations of fund diversion and siphoning by Moser Baer Solar Ltd. (MBSL), where the Petitioner was previously a director. The court examined whether the Respondent Bank's actions were in line with the Master Circular's requirements, which mandate that a default must be "intentional, deliberate and calculated" and based on "objective facts and circumstances." The court found that the Respondent Bank failed to independently verify the allegations and relied solely on the Forensic Audit Report, which was deemed insufficient.

2. Examination of Standards and Procedures for Declaring a Person as a Wilful Defaulter:
The court reviewed the RBI's Master Circular, which outlines the process for identifying Wilful Defaulters. This includes an examination by an Identification Committee, issuance of a show cause notice, and a review by a Review Committee. The Master Circular requires that the decision be based on a comprehensive assessment of the borrower's track record and not isolated incidents. The court emphasized that the Respondent Bank did not adhere to these standards, as it did not conduct an independent assessment of the Petitioner's actions.

3. Analysis of the Forensic Audit Report as a Basis for Declaring Wilful Default:
The Forensic Audit Report was central to the Respondent Bank's decision, but the court highlighted that such reports are not conclusive evidence of wrongdoing. The report should serve as a corroborative tool rather than the sole basis for declaring Wilful Default. The court criticized the Respondent Bank for not conducting its own analysis and relying entirely on the audit report's findings, which lacked definitive conclusions on fund diversion.

4. Impact of the Corporate Debt Restructuring (CDR) Scheme on the Declaration of Wilful Default:
The court discussed the CDR scheme, which allows financially distressed companies to restructure their debts. MBSL was admitted into the CDR scheme, and the court noted that the lender banks, including the Respondent Bank, were aware of the financial transactions and investments made by MBSL. The banks classified MBSL as a Class-B borrower, indicating that it was affected by external factors rather than fund diversion. The court concluded that the Respondent Bank's later classification of these transactions as Wilful Default was inconsistent with its earlier assessments during the CDR process.

5. Consideration of the Track Record of the Borrower:
The court emphasized the importance of considering the borrower's overall track record, as stipulated in the Master Circular. MBSL had a history of servicing its debts and was recognized as a global player in photovoltaic cells. The court found that the Respondent Bank failed to account for MBSL's positive track record and instead focused on isolated transactions, which did not justify the Wilful Default declaration.

Conclusion:
The court quashed the Respondent Bank's order declaring the Petitioner as a Wilful Defaulter, citing procedural lapses and inadequate evidence. The decision underscored the necessity for banks to conduct thorough and independent investigations before making such declarations, ensuring compliance with the RBI's Master Circular and considering the borrower's complete track record.