2025 (1) TMI 958 - HC - Companies Law

Challenge to orders passed by the Respondent No. 1 declaring him as Wilful Defaulter on the basis of a Transaction Audit Report - procedural requirements under the Master Circular on Wilful Defaulters issued by the Reserve Bank of India (RBI) complied with or not - substantial opportunity of being heard not provided - documents on the basis of which a decision to declare him as Wilful Defaulter was taken were not provided - violation of principles of natural justice - HELD THAT - Clause 2.5 of the Master Circular provides for initiation of penal measures against the persons or entities declared as wilful defaulter under Clause 2.1.3 of the Master Circular which includes non-grant of additional loan facility by any bank or financial institution in the future; debarring them from floating new venture for a period of five years from the date of removal of name as wilful defaulter; initiation of criminal proceedings; change of management of borrower unit; non-induction of the person in the Board of the company etc. The object of the Master Circular is salutary. The Master Circular aims to protect the country s banks and financial institutions from unscrupulous entities and individuals. It is intended to identify and punish those entities and individuals who have diverted or siphoned off borrowed funds for purposes other than for which the loan facility was availed leading to default in the repayment obligations. Such individuals and entities must be identified and their names be published in public domain so that they are barred from availing any further loan facility from any other bank. If such an exercise is not undertaken the cycle of diversion/siphoning of borrowed funds; default and re-borrowing leading to same situation may continue. Such a scenario may adversely affect the liquidity of the banking system and affect the overall financial health of the country. There is thus no doubt that the Master Circular aims to achieve a very laudable object. Notably the scheme of the Master Circular indicates that it is both a punitive and preventive measure. The Supreme Court in the case of Jah Developers 2019 (5) TMI 862 - SUPREME COURT had an occasion to examine the consequences of a person being declared as wilful defaulter under the Master Circular. The Supreme Court held that a person declared as wilful defaulter affects the fundamental right of a person under Article 19 (1) (g) of the Constitution as it directly affects the right to do business and thus the Master Circular must be construed reasonably. The graver the consequences of such civil action the higher is the degree of proof required. If this principle of law is tested on the anvil of the Master Circular it is clear that the Master Circular entails not only grave civil but also penal consequences. Considering the subject matter and grave civil and penal consequences the validity of an order declaring as wilful defaulter would require a closer scrutiny as to whether such an order falls within the four corners of the procedural mechanism prescribed in Master Circular or is it otherwise. It is thus safe to accept that the basis of issuance of the SCN was primarily the findings in the TAR which were observed by the NCLT to be mere assumptions. Considering the grave consequences that follow a finding by the WDC the degree of proof required and expected to have been relied upon by the WDC should be much higher and not simply based on a TAR which itself was unacceptable to the NCLT. Principles of natural justice - HELD THAT - It is not for the WDC to shrug away its responsibility under the pretext of such presumptions and assumptions. The statutory procedural mechanism laid down in the Master Circular interpreted in various decisions of the Supreme Court must be followed by the Respondent No. 1 and its committees in letter and spirit. There are no hesitation in agreeing with the Petitioner that the personal hearing cannot be construed to be meaningful with the Petitioner having his hands tied behind in the context of the Respondent No. 1 withholding the necessary documents and expecting to offer his comments. Maintainability of the present petition against the Respondent No. 1-Bank - HELD THAT - The Supreme Court in the matter of Jah Developers 2019 (5) TMI 862 - SUPREME COURT clearly expressed its view that Article 19 (1) (g) of the Constitution of India is attracted as the moment a person is declared as wilful defaulter there is a direct and immediate impact on his fundamental right to carry on business. It is settled law that a Fundamental right under Article 19 or 21 can be enforced even against persons other than State or its instrumentalities - there are no hesitation in holding the present petition to be maintainable against the present Respondent No. 1. Conclusion - The statutory procedural mechanism laid down in the Master Circular interpreted in various decisions of the Supreme Court must be followed by the Respondent No. 1 and its committees in letter and spirit. The necessity of adhering to procedural fairness and natural justice in proceedings that have severe consequences such as being declared a wilful defaulter established. The SCN and related orders quashed due to procedural lapses and violations of natural justice while affirming the maintainability of the Petition under Article 226. Petition allowed.

Summary

1. ISSUES PRESENTED and CONSIDERED

The core legal questions considered in this judgment include:

• Whether the procedural requirements under the Master Circular on Wilful Defaulters issued by the Reserve Bank of India (RBI) were adhered to by the Respondent No. 1 Bank in declaring the Petitioner as a wilful defaulter.
• Whether the principles of natural justice were violated due to the non-disclosure of documents relied upon in the Show Cause Notice (SCN) and subsequent proceedings.
• Whether the Petition against a private bank is maintainable under Article 226 of the Constitution of India.
• Whether the findings of the Wilful Defaulter Committee (WDC) and the Wilful Defaulter Review Committee (WDRC) were based on adequate evidence and proper reasoning.

2. ISSUE-WISE DETAILED ANALYSIS

Issue 1: Procedural Adherence under the Master Circular

• Relevant Legal Framework and Precedents: The Master Circular on Wilful Defaulters issued by the RBI outlines the procedure for identifying and declaring an entity or individual as a wilful defaulter. It mandates a transparent mechanism with opportunities for representation and personal hearing.
• Court's Interpretation and Reasoning: The Court emphasized the importance of following the procedural mechanism laid down in the Master Circular, especially given the severe consequences of being declared a wilful defaulter.
• Key Evidence and Findings: The Court noted that the decision to declare the Petitioner as a wilful defaulter was primarily based on a Transaction Audit Report (TAR) deemed inconclusive by the NCLT.
• Application of Law to Facts: The Court found that the procedural requirements were not met, particularly the failure to provide the Petitioner with necessary documents to prepare a defense.
• Treatment of Competing Arguments: The Respondent argued that the Petitioner had access to the TAR during NCLT proceedings, but the Court held that the Petitioner was entitled to specific documents for the WDC proceedings.
• Conclusions: The Court concluded that the procedural lapses warranted quashing the orders declaring the Petitioner a wilful defaulter.

Issue 2: Principles of Natural Justice

• Relevant Legal Framework and Precedents: Natural justice principles require fair hearing and access to evidence relied upon in adverse decisions.
• Court's Interpretation and Reasoning: The Court highlighted that the denial of access to documents violated the principles of natural justice, as it impeded the Petitioner's ability to defend himself.
• Key Evidence and Findings: The Petitioner's repeated requests for documents were ignored, and he was expected to respond to the SCN without adequate information.
• Application of Law to Facts: The Court found that the lack of document disclosure and meaningful hearing constituted a breach of natural justice.
• Treatment of Competing Arguments: The Respondent's reliance on the TAR and assumption of the Petitioner's access to documents was deemed insufficient by the Court.
• Conclusions: The Court determined that the process was flawed due to the failure to adhere to natural justice principles.

Issue 3: Maintainability of the Petition

• Relevant Legal Framework and Precedents: Article 226 of the Constitution allows writ petitions against entities affecting fundamental rights, even if not a 'State' under Article 12.
• Court's Interpretation and Reasoning: The Court referenced Supreme Court rulings that fundamental rights can be enforced against non-state actors if they affect rights under Articles 19 or 21.
• Key Evidence and Findings: The Court noted that being declared a wilful defaulter impacts the fundamental right to carry on business.
• Application of Law to Facts: The Court held that the Petition was maintainable as it involved the Petitioner's fundamental rights.
• Treatment of Competing Arguments: The Respondent's argument that it was not a 'State' was dismissed based on broader interpretations of fundamental rights enforcement.
• Conclusions: The Petition was deemed maintainable against the Respondent Bank.

3. SIGNIFICANT HOLDINGS

• Preserve Verbatim Quotes of Crucial Legal Reasoning: "The statutory procedural mechanism laid down in the Master Circular, interpreted in various decisions of the Supreme Court must be followed by the Respondent No. 1 and its committees in letter and spirit."
• Core Principles Established: The judgment reinforced the necessity of adhering to procedural fairness and natural justice in proceedings that have severe consequences, such as being declared a wilful defaulter.
• Final Determinations on Each Issue: The Court quashed the SCN and related orders due to procedural lapses and violations of natural justice, while affirming the maintainability of the Petition under Article 226.

The judgment underscores the importance of procedural compliance and fairness in administrative proceedings, particularly those affecting fundamental rights and reputations. It also clarifies the applicability of constitutional remedies against non-state actors in specific contexts.