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2024 (5) TMI 742 - HC - Companies LawWillful Defaulters - whether the respondent-Bank, that is, the Central Bank of India was justified in declaring the petitioners to be willful defaulters through its First Committee and in affirming the same in the decision of the RC? - HELD THAT - The present respondent-Bank, the Central bank of India, was one of the constituents of the Consortium and thus, being represented by the Liquidator, is also bound by the NCLT order refusing to accept the said report. Thus, the respondent-Bank s efforts to declare the writ petitioners as willful defaulters on the sole basis of the TAR are not tenable in the eye of law. To add to the woes of the respondents further, the lead Bank of the Consortium, the Punjab National Bank (PNB), although initially took a view that the petitioners were willful defaulters, subsequently did a volte face and, by relying on the dismissal of the TAR by the NCLT, as affirmed by the NCLAT, the PNB held that the petitioners are not willful defaulters, leaving it open for the Bank to proceed in future on the basis of independent material, if the same comes forth. However, till date, nothing has come forward by way of independent material to substantiate the stand of the respondents - the reliance on the TAR in the decisions of the First Committee and the RC are entirely de hors the law and perverse. Several allegations have been made regarding fixed deposits being opened, furniture and cars having not been shown as assets, etc. The petitioners categorically refuted the claims by contending that there was no link between the credit taken from the Consortium and the utilization of such assets/funds. Hence, having failed to substantiate any link between the loan granted and the use alleged and in the absence of any material to substantiate that the loan was used for any other purpose than that intended, the very premise of the willful defaulter declaration goes - The Bank, vainly, has sought to project that the NCLT order was confined to the TAR not being used for lodging criminal complaints. The Bank also argues that the Central Bank of India, being a constituent of the creditor-Consortium, could have proceeded with the willful defaulter proceeding despite no specific allegation regarding the loan given by the Central Bank having been referred to either in the Show Cause or the TAR or the First Committee order - Such argument is wholly untenable. If the respondent-Bank seeks to take refuge of its being a constituent of the Consortium, it is bound by the decision of the lead Bank, the PUNJAB NATIONAL BANK, to drop the charges of willful defaulter in terms of the NCLT Order refuting the TAR. There is no reasoned order at all in the present case by the RC which vitiates the decision of the RC on such count alone. However, the observations made hereinabove vitiate the First Committee decision itself, thus rendering the RC decision an exercise in futility ab initio - the decision of both the First Committee and the RC declaring the petitioners to be Willful Defaulters are hereby set aside and quashed. Petitions are allowed on contest, thereby setting aside and quashing the decisions of the Willful Defaulters Identification Committee and the Review Committee declaring the petitioners to be Willful Defaulters.
Issues Involved:
1. Legitimacy of the First Committee's decision to declare petitioners as Willful Defaulters. 2. Validity of the Review Committee's decision affirming the First Committee's declaration. 3. Reliance on the Transaction Audit Report (TAR) by the First Committee and Review Committee. 4. Compliance with natural justice and procedural requirements. Summary: Legitimacy of the First Committee's Decision The petitioners challenged the decision of the Willful Defaulter Identification Committee (First Committee) to declare them as Willful Defaulters under the Master Circular on Wilful Defaulters issued by the RBI on July 1, 2015. The First Committee's decision was based solely on a Transaction Audit Report (TAR) by M/s. Deloitte Touche Tohmatsu India, LLP, which itself was inconclusive and not independently verified. The TAR explicitly stated it was not suitable for legal proceedings and was prepared solely for internal use, thus vitiating its conclusiveness, veracity, and credibility. Validity of the Review Committee's Decision The petitioners also challenged the Review Committee's (RC) decision to affirm the First Committee's declaration. The RC's decision was found to be grossly mechanical, clubbing twenty-one entities together without individual consideration and relying solely on the TAR. The RC failed to provide a reasoned order, as required by the Supreme Court in State Bank of India vs. Jah Developers Private Limited and Others, thereby violating principles of natural justice. Reliance on the Transaction Audit Report (TAR) The TAR was prepared by the Auditor at the behest of the Liquidator in a Corporate Insolvency Resolution Process (CIRP) and was rejected by both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) for lack of independent material. The Central Bank of India, being a constituent of the creditor-Consortium, was bound by the NCLT order refuting the TAR. The lead Bank of the Consortium, Punjab National Bank (PNB), also dropped the charges of willful default based on the NCLT's rejection of the TAR. Compliance with Natural Justice and Procedural Requirements The RC adopted a mechanical approach, failing to provide individual consideration and a reasoned order. The Supreme Court mandates that the RC must pass a reasoned order on the borrower's representation, which was not done in this case. The decisions of both the First Committee and the RC were thus vitiated for non-compliance with natural justice and procedural requirements. Conclusion The decisions of both the First Committee and the RC declaring the petitioners as Willful Defaulters are set aside and quashed. All consequential steps, including the uploading of the names of the petitioners as Willful Defaulters, shall be immediately reversed by the respondents. There will be no order as to costs.
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