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TMI Blog2020 (9) TMI 844X X X X Extracts X X X X X X X X Extracts X X X X ..... aults by an entity as expressed in the Master Circular which is binding on the respondent Bank - HELD THAT:- Section 29-A (Persons not eligible to be Resolution Applicant) lists the categories of persons who are not eligible to submit a resolution plan and includes a wilful defaulter under the RBI guidelines (clause (b)) as well as a connected person enumerated under clause (j) including a promoter of the resolution applicant (the Company in this case). Against these provisions, the case sought to be made out on behalf of the petitioners is that the petitioners would altogether be excluded from participating in the resolution process despite being inextricably linked to the fate of the corporate debtor. Whether the post of Deputy Managing Director (mentioned as the head of the appropriate committee in the impugned notice) is equivalent to that of the Executive Director (under clause 3(a)) of the Master Circular? - HELD THAT:- This court also takes judicial notice of the fact that there are presently no Executive Directors on the Board of the State Bank of India which is comprised of a Chairman, Managing Directors and Directors. As on 7th September, 2020, the Board of Dire ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ttached to the decision of the first/identification Committee and more so at the stage of a Show-Cause Notice. Further, the Petitioners in this case received the impugned show-cause notice dated 14th November, 2019 together with the Annexure on 18th November, 2019. The date of receipt would appear from the reply of the petitioners dated 19th December, 2019 to the Show-Cause Notice. The challenge to the impugned Show Cause Notice dated 14th November, 2020 and the Notice dated 6th August, 2020, fails - Petition dismissed. - I.A.No.G.A.1 of 2020 With (Old G.A.1062 of 2020) With W.P.O.236 of 2020 - - - Dated:- 15-9-2020 - HON BLE JUSTICE MOUSHUMI BHATTACHARYA For the Petitioners : Mr. Sabyasachi Chowdhury, Sr. Adv. Ms. Sanjukta Ray, Adv. For the Respondents : Mr. Om Narayan Rai, Adv. Moushumi Bhattacharya, J. 1. The challenge in this writ petition is to a notice issued by the respondent State Bank of India to the petitioners by which the petitioners have been called upon to show cause and make submissions in writing within 30 days from the date of receipt of the notice as to why their names should not be included in the list of wilful defaulters as per the Res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mitted that the notices do not disclose the satisfaction of the Identification Committee and is not in consonance with the relevant clause of the RBI circular. Counsel relies on Atlantic Projects Limited versus Allahabad Bank, a decision of a learned Single Judge of this court in W.P. No. 7471 (W) of 2019 where the court held that the requirement of clause 3(b) of the Master Circular must be discharged by the Identification Committee before a show-cause notice can be issued. According to counsel, Atlantic Projects held that clause 3(b) requires application of mind by the Identification Committee at all stages before a show-cause notice can be issued on a defaulting borrower. 4. Mr. Om Narayan Rai, learned counsel appearing for the respondents/SBI and its Deputy General Manager, relies on a Division Bench judgment of this Court in CAN 5340 of 2019 in MAT 787 of 2019: Union Bank of India versus Sudhir Kumar Patodia/Pawan Kumar Patodia , which, according to counsel, has overruled the Single Bench decision in Atlantic Projects by implication. Counsel submits that the Division Bench held that even if the power to issue a show cause notice has been delegated, the notice its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lies not only the formation and constitution of the Committee under clause 3(a) of the Master Circular but also sub-clause (b) which requires formation of opinion by the Committee before a show-cause notice is issued to the intended party. 7. I will first deal with the preliminary issue which is that any proceedings initiated against the petitioners as guarantors of the Company would meet a roadblock in the form of section 14 of the IBC under which Moratorium has been declared against the Company. The argument sought to be urged on behalf of the petitioners is that after declaration of the Moratorium on 17th March, 2020, subjecting the petitioners to initiation of proceedings under the Master Circular by way of the impugned Show-Cause Notice issued subsequent to the declaration of Moratorium would be contrary to the provisions of the IBC. For testing the strength of this submission, the relevant part of section 14 of the IBC is required to be set out; 14. Moratorium. (1) Subject to provisions of sub-sections (2) and (3), on the insolvency commencement date, the Adjudicating Authority shall by order declare moratorium for prohibiting all of the following, namely :- ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... out to promoters of a corporate debtor, section 128 of the Indian Contract Act, 1872 must be kept in mind where the liability of the surety is co-extensive with that of the principal debtor unless the contract provides to the contrary. This also finds place in clause 2.6 of the Master Circular which is extracted below: 2.6 Guarantees furnished by individuals, groups companies non-group companies While dealing with wilful default of a single borrowing company in a Group, the banks / FIs should consider the track record of the individual Company, with reference to its repayment performance to its lenders. However, in cases where guarantees furnished by the companies within the Group on behalf of the wilfully defaulting units are not honoured when invoked by the banks / FIs, such Group companies should also be reckoned as wilful defaulters. In connection with the guarantors, in terms of Section 128 of the Indian Contract Act, 1872, the liability of the surety is co-extensive with that of the principal debtor unless it is otherwise provided by the contract. Therefore, when a default is made in making repayment by the principal debtor, the banker will be able to proceed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e rank of GM / DGM. (b) If the Committee concludes that an event of wilful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter / whole-time director and call for their submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter / whole-time director for a personal hearing if the Committee feels such an opportunity is necessary. (c) The Order of the Committee should be reviewed by another Committee headed by the Chairman / Chairman Managing Director or the Managing Director Chief Executive Officer / CEOs and consisting, in addition, to two independent directors / non-executive directors of the bank and the Order shall become final only after it is confirmed by the said Review Committee. However, if the Identification Committee does not pass an Order declaring a borrower as a wilful defaulter, then the Review Committee need not be set up to review such decisions. Clause 3(a) specifies the composition of the Committee which is entrusted with the task of first identifying and then exa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... making such non-application evident in the Show Cause Notice thus rendering it vulnerable. Clause 3(b) starts with If the Committee concludes that an event of wilful default has occurred thereby implying that the condition precedent to issuing a Show Cause Notice to the concerned borrower is of the Committee forming an opinion on the basis of available evidence as to whether there has been a wilful default under clause 3(a). The petitioners contend that the impugned Notice is devoid of any indication that the appropriate Committee has indeed done what it is supposed to do under clause 3, namely apply its mind to the materials which would identify the petitioners for the purposes of the Show Cause Notice. For assessing the worth of this contention, the impugned Notice should be seen against the mandate of clause 3(b). While it is correct that the first page of the Notice is opaque in terms of making the workings of the Committee s mind known to the petitioners/recipients of the Notice, the lacuna is addressed by the Annexure to the Notice stating the Justification/Reasons for declaring the Borrower as Wilful Defaulter . The accompanying tabulated statement lists the criteri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ee dated 17th June, 2019 provides sufficient material (and particulars specific to the Company of which the petitioners are guarantors) to satisfy that the Committee had indeed fulfilled its mandate under both sub-clauses (a) and (b) of clause 3. One of the most obvious ways in which working of the mind or some sort of deliberation by the persons concerned can be shown is by articulation of the findings arrived at with reference to a meeting (including of minds) where such deliberation palpably took place and the findings being relatable to the materials/evidence before the Committee entrusted with the duty to sift through the evidence to come to the conclusions. 15. Now to the decisions cited in support of the arguments advanced. Atlantic Projects, decided on 3rd May, 2019 was on a challenge to a Show Cause Notice in which the petitioner had contended that the function of issuing a Show Cause Notice cannot be delegated to a person who is not a member of the Identification Committee. The Learned Single Judge held that an identified administrative authority cannot delegate its power to issue a Show Cause Notice under clause 3 of the Master Circular. The finding in that case was t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the Division Bench and it was held that the purpose of such a notice was to make the charges known to the borrower so that it could give a comprehensive explanation to and defend the same in the form of a hearing etc. Besides these, Pawan Kumar Patodia is a later decision compared to the Single Bench decision in Atlantic Projects and considered the same issues which were canvassed in the latter. It is significant that in Pawan Kumar Patodia, the Division Bench refused to interfere with the Show Cause Notice despite finding that the Notice was issued by an entity not prescribed under clause 3(a) of the Master Circular. The fact that the Division Bench was also of the view that the Show Cause Notice need not reflect the decision taken by the concerned committee effectively takes care of both the points urged by the petitioners in this case with regard to clause 3 of the Master Circular. It should also be pointed out that the Division Bench considered Jah Developers (relied on by the petitioners here) and expressed its reservations on the decision being of assistance to the writ petitioners/respondents before the Division Bench. 17. The conduct of the petitioners as would appea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that the petitioners were initially not averse to appearing before the concerned Committee for making their submissions with regard to the impugned show-cause notice. The reason given for the petitioners inability to appear on 29th July, 2020 was the pandemic and the petitioners requested for a date in August 2020. The correspondence indicates that the petitioners were not averse to a personal hearing, per se. 18. A few decisions have been cited on behalf of the respondent on whether an improper act / decision can be cured by subsequent ratification, including Marathwada University Vs. Seshrao Balwant Rao Chavan (AIR 1989 SC 1582). Since this Court is of the view that there was no defect in the act of issuing the impugned Show Cause Notice by reason of the composition of the issuing authority under the guidelines, this court refrains from dealing with the decisions as it would become an academic exercise. 19. For the reasons as stated above, the challenge to the impugned Show Cause Notice dated 14th November, 2020 and the Notice dated 6th August, 2020, fails. The petitioners are not entitled to the reliefs claimed in WPO 236 of 2020 which is accordingly dismissed with ..... X X X X Extracts X X X X X X X X Extracts X X X X
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