2024 (3) TMI 991 - HC - Companies Law

Validity of SCN proposing to declare the petitioners as wilful defaulters - Classification of Account as NPA - Impact of CIRP proceedings under IBC - Declaring the petitioners as wilful defaulters in terms of the Master Circular on Wilful Defaulters issued by the Reserve Bank of India (RBI) on July 1, 2015 - whether the injunction order passed by the writ court against the respondent-Bank, on the premise that the NPA classification was de hors the Master Circular, can be a relevant consideration for vitiating the Show-cause Notice? - HELD THAT - In the present lis, even if the best case of the petitioners is taken into consideration, applying the Pandemic Circulars of the RBI extending the time for making good defaults, on and from November 30, 2020, the petitioner no. 1 was a defaulter. Apparently, no repayment has been made since then. Thus, it cannot be said that merely because the NPA classification is clouded in a writ petition, the respondent-Bank cannot proceed with the wilful defaulter proceeding. However, it is made clear that the purported communications of the petitioners handed over by the Bank at the time of arguments cannot be looked into at this stage, having not been referred to in the Show-cause Notice. The principle laid down in MOHINDER SINGH GILL ANR. VERSUS THE CHIIEF ELECTION COMMISSIONER, NEW DELHI ORS. 1977 (12) TMI 138 - SUPREME COURT is squarely applicable as well, precluding the respondent from furnishing new grounds which were not there in the original Show cause Notice. Show-cause Notice contains reference to the assets of the petitioner nos. 2 to 9, who were Directors of the Company, which assets are not part of the assets of the borrower-Company - HELD THAT - A Show-cause Notice need no plead in detail the full particulars of the requirements of the Master Circular but is required merely to outline the broad spectrum of offences committed by the borrower, its Directors and the guarantors to be labelled as wilful defaulters. The proper stage for consideration of compliance of Clause 2.6 on all other aspects is the order passed by the Wilful Defaulter Identification Committee on consideration of the Show-cause Notice and the reply thereto. Hence, the merits of the said allegation cannot be considered in detail. Sufficient ingredients to justify the allegations have been spelt out in the Show-cause Notice to bring the same within the broad purview of the Master Circular. The said ingredients, read in conjunction with the FAR and other documents which may be relied on by the Bank, are to be taken in conjunction at the time of consideration by the Wilful Defaulter Identification Committee and not at the show-cause stage. The composite effect of the documents and the broad allegations made in the Show-cause Notice are the subject-matter of adjudication by the said Committee, and thereafter the Review Committee. At the stage of Show-cause Notice, the court cannot adopt a fault-finding approach but such a Notice is to be seen in the perspective of disclosing sufficient ingredients to make the noticee aware of the nature of allegations made against it. Moreover, it is well-settled that under normal circumstances, courts are loathe to interfere at the show-cause stage since the noticee has the remedy of giving a reply thereto available to it. The merits of the allegations and defences can only be gone into by the first committee while deciding the matter. Thus, a wilful defaulter proceeding does not come within the contemplation of Section 14 or Section 96 of the IBC, which primarily pertains to legal actions to foreclose, recover or enforce security interest, or recovery of any property of the debt-in-question. In P. MOHANRAJ ORS. VERSUS M/S. SHAH BROTHERS ISPAT PVT. LTD. 2021 (3) TMI 94 - SUPREME COURT , the Supreme Court has repeatedly highlighted, particularly in paragraph nos. 35.2 and 35.3, that the moratorium concerns not merely recovery of debt but any legal proceeding even indirectly relatable to recovery of any debt. Hence, the moratorium applies to recovery proceedings and proceedings which directly or indirectly relatable to such recovery. A wilful defaulter proceeding cannot, by any stretch of imagination, be said to be even remotely relatable to recovery of debt but is merely an off-shoot of the debt. The corpus of debt is not the subject-matter of a wilful defaulter proceeding, unlike a recovery proceeding, but is a mere stimulus to spur the wilful defaulter proceeding into motion. Petition is disposed of by directing the respondent-bank to serve a copy of the Forensic Audit Report and/or any other document, on which the bank intends to rely to substantiate the show-cause allegations, on the petitioners within a week from date.

Summary

Issues Involved:
1. Validity of the Show-cause Notice issued for declaring the petitioners as wilful defaulters.
2. Relevance of the NPA classification and the interim injunction order.
3. Applicability of Section 96 of the IBC.
4. Inclusion of assets of Directors/guarantors in the Show-cause Notice.
5. Non-provision of the Forensic Audit Report (FAR) to the petitioners.

Summary of Judgment:

Validity of the Show-cause Notice:

The petitioners challenged a Show-cause Notice dated March 1, 2024, issued by the respondent-Authorities for declaring them as wilful defaulters per the RBI Master Circular on Wilful Defaulters. The court held that the Show-cause Notice need not plead in detail the full particulars but must outline the broad spectrum of offences committed by the borrower, its Directors, and guarantors to be labelled as wilful defaulters. The court found that the impugned Show-cause Notice was not so bland, vague, or devoid of proper ingredients as to justify nipping the same at the bud.

Relevance of the NPA Classification and Interim Injunction Order:

The court noted that the interim order did not stay the operation of the NPA classification. The injunction restrained the bank from proceeding based on or giving effect to the proposal for sale of NPAs. The court held that the event of default by the borrower precedes the classification of the account as NPA. Thus, the NPA classification is irrelevant for holding a borrower to be a defaulter. The court concluded that the respondent-Bank could proceed with the wilful defaulter proceeding despite the NPA classification being clouded in a writ petition.

Applicability of Section 96 of the IBC:

The court referred to Gouri Prasad Goenka Vs. State Bank of India and P. Mohanraj and others Vs. Shah Brothers Ispat Private Limited, observing that a wilful defaulter proceeding does not come within the contemplation of Section 14 or Section 96 of the IBC. The court held that the moratorium under Section 96 does not apply to wilful defaulter proceedings, which are not directly or indirectly relatable to the recovery of debt.

Inclusion of Assets of Directors/Guarantors in the Show-cause Notice:

The court found that the mentioning of the assets of the guarantors in the context of the alleged wilful default cannot be said to be wholly irrelevant. Under Clause 2.6 of the RBI Master Circular, the liability of the guarantor is co-extensive with that of the principal debtor. The court held that a Show-cause Notice need not detail all requirements of the Master Circular but should provide sufficient ingredients to make the noticee aware of the allegations.

Non-provision of the Forensic Audit Report (FAR):

The court acknowledged that the absence of the FAR would make the right of the petitioners to reply to the Show-cause Notice illusory. However, the court did not set aside the Show-cause Notice on this ground. Instead, it directed the respondent-bank to serve a copy of the FAR and any other relied-upon documents to the petitioners within a week. The petitioners were granted a further fortnight to file their replies to the Show-cause Notice.

Conclusion:

The court disposed of WPO No. 204 of 2024 by directing the respondent-bank to serve the FAR and any other documents on the petitioners and granted an extension for filing replies. The respondent-Bank was allowed to proceed with the wilful defaulter proceeding in accordance with the RBI Master Circular and the law.