2020 (12) TMI 1020 - HC - Insolvency and Bankruptcy

Maintainability of petition - CIRP proceedings still going on - validity of proposed declaration of the petitioners as wilful defaulters under the RBI Master Circular dated July 1, 2015 - HELD THAT - CIRP proceedings are going on in respect of the company-in-question vide order dated February 7, 2020 passed by the National Company Law Tribunal, Kolkata, thus, disabling the company itself from preferring the writ petition. That apart, since the show-cause notice was issued to the petitioners themselves and the petitioners were held to be wilful defaulters, the present challenge at the behest of the petitioners, without impleading the company separately, is valid in law. Although the respondents have pleaded public interest in the matter, the mechanism of declaring wilful default was put in place to prevent corrosion of the economy and financial malpractices. However, lack of transparency in the mechanism of declaring wilful defaulters would itself be a major disincentive to commerce, which would adversely affect the economy at large. Even if not a stigma by itself, such declaration has far-reaching effect, since the concerned persons would not get any loans or other financial benefits and incentives in future due to such declaration. Hence, the respondents argument, as to the irregularity committed by them being minor and without prejudice to the petitioners, does not hold water - Not only did the respondents arrive at conclusive findings in the show-cause notice itself, thereby hinting at a predetermined and closed mind-set, having pre-decided that the petitioners were wilful defaulters even prior to the orders of the two committees, no copy of the Identification Committee order was handed over to the petitioners at all. The flimsy pretext that the said order was a virtual reiteration of the initial order of the committee defies logic since, after such order, a coordinate bench of this court had specifically directed fresh order to be passed, thereby rendering the previous order infructuous. The admission of the respondents that the subsequent order was a mere reiteration of the previous order itself vitiates the sanctity of the latter order for lack of application of independent judicial mind in the second adjudication. The Identification Committee permitted the petitioners to file their reply directly before the Review Committee, which deprived the petitioners of a hearing before the first committee. The scope of consideration by the Review Committee would only arise once the Identification Committee decides the matter of declaration of wilful defaulter upon considering the stand of the alleged delinquent. Without such opportunity, the order of the Identification Committee would be incomplete, being bereft of the delinquents version, leaving no scope for the Review Committee to consider the petitioners defence - the argument, that the Review Committee had no option but to confirm the Identification Committee order in its entirety, is based on faulty logic, since the petitioners had, in fact, specifically asked for a copy of forensic report and other relevant documents, which was denied to them. Thus, it was impossible for the petitioners to put their representation on fact and law before either of the Committees. The petitioners had no opportunity to refute the observations of the forensic report, to show its inherent contradictions and/or point out the irrelevance of the report in the context of declaration of willful default, although the report was virtually the sole basis of the show cause notice and the impugned orders. The committees acted contrary to logic befitting a prudent person in relying on the same as sacrosanct to hold the petitioners to be wilful defaulters - the entire effort of the Identification Committee and the Review Committee was to somehow label the petitioners as wilful defaulters, in the process violating all norms of natural justice and the provisions of the RBI Master Circular, 2015. The impugned orders are patently illegal and de hors the RBI guidelines - Petition allowed.

Issues Involved:
1. Procedural irregularities in the classification of petitioners as wilful defaulters.
2. Non-supply of forensic report and relevant documents to the petitioners.
3. Validity of the orders passed by the Identification Committee and the Review Committee.
4. Applicability of the RBI Master Circular, 2015.
5. Petitioners’ locus standi to file the writ petition.

Detailed Analysis:

1. Procedural Irregularities in Classification as Wilful Defaulters:
The petitioners argued that the Identification Committee had already reached a conclusion regarding their classification as wilful defaulters before issuing the show-cause notice, indicating a predetermined decision. They also contended that they were not provided with the forensic report, which was the basis of the orders, nor were they given the Identification Committee's order, depriving them of a proper opportunity to defend themselves. The court found that the respondents arrived at conclusive findings in the show-cause notice itself, hinting at a predetermined mindset. The respondents' failure to provide the Identification Committee's order and forensic report violated natural justice norms, rendering the process flawed.

2. Non-Supply of Forensic Report and Relevant Documents:
The petitioners were not given a copy of the forensic report, which was critical to the Identification and Review Committees' decisions. The court noted that the forensic report was only annexed to the vacating application and not provided at any stage prior, which deprived the petitioners of the opportunity to make a meaningful representation. The court held that non-service of the forensic report at the relevant juncture was a significant procedural lapse, vitiating the legality of the committees' orders.

3. Validity of Orders Passed by the Identification Committee and Review Committee:
The court observed that the Review Committee's order was identical to the Identification Committee's order, indicating no independent application of mind. The entire process of declaring the petitioners as wilful defaulters was found to be a farce, as the petitioners were not given a fair opportunity to present their case. The court set aside the orders of both committees due to these procedural irregularities and lack of transparency.

4. Applicability of the RBI Master Circular, 2015:
The court emphasized that the RBI Master Circular, 2015, which is penal in nature, must be strictly construed. Clause 3(b) of the Master Circular requires a show-cause notice to be issued to the concerned borrower and the promoters/whole-time directors. The court found that the mechanism for identifying wilful defaulters could not apply to persons other than promoters/whole-time directors, thus vitiating the orders against petitioner nos. 3 to 12. The court also held that the respondents' argument of minor procedural deviations not causing prejudice to the petitioners was untenable.

5. Petitioners’ Locus Standi to File the Writ Petition:
The court recognized the petitioners' locus standi to file the writ petition, given that the company was undergoing corporate insolvency resolution process and could not move the petition itself. The show-cause notice and orders were issued against the petitioners, justifying their challenge to the classification as wilful defaulters.

Conclusion:
The court allowed the writ petition, setting aside the show-cause notice dated November 5, 2019, and the orders of the Identification Committee and the Review Committee. The respondents were permitted to initiate fresh proceedings in compliance with Clause 3 of the RBI Master Circular, 2015, ensuring proper service of show-cause notices and relevant documents to enable the petitioners to make proper representations. The court emphasized the importance of transparency and adherence to natural justice principles in the process of declaring wilful defaulters.

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