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TMI Blog2024 (6) TMI 837X X X X Extracts X X X X X X X X Extracts X X X X ..... is governed by RBI s Master Directions on Fraud. The willful defaulter orders are issued under the RBI s Master Circular. Though show cause notice was issued and a personal hearing was given to the petitioners before issuing the willful defaulter orders, a perusal of the show cause notice indicates that except for calling upon the petitioners to explain the allegations made in the show cause notice, no material was supplied to the petitioners indicating as to on what basis the respondent bank arrived at a prima facie opinion that petitioners are willful defaulters. A perusal of the allegations in the show cause notice and the observations made by WDIC and the review committee indicates that the grounds accepted by WDIC and the review committee does not form part of the allegations in the show cause notice. Thus, the petitioners are justified in making a grievance that respondent bank has not followed the basic principles of natural justice before declaring the petitioners as willful defaulters - It is a matter of record that the prima facie view taken by the bank in the show cause notice was not supported by any material supplied to the petitioners. Thus, the petitioners accused o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner no. 1 in respect of financial assistance availed from respondent no. 2 bank. Petitioner no. 4 was an erstwhile guarantor in respect of financial assistance availed by petitioner no. 1 from respondent nos. 1 and 2. In the writ petition of Govinda Industries Private Limited, petitioners nos. 2 to 4 are directors of petitioner no. 1, and petitioners nos. 2 and 5 are the guarantors of petitioner no. 1 in respect of the financial assistance which petitioner no. 1 availed from respondents nos. 1 and 2. 4. It is the petitioners case that without issuing any notice to them and without giving an opportunity of hearing, petitioner no. 1 s loan account has been declared to be a fraud account under the RBI s Master Directions on Fraud. It is the petitioners case that they learnt about the fraud declaration only in the month of May/June 2023, as specifically pleaded in the petition. It is further the petitioners case that an ordinary loan default has been arbitrarily categorized as a willful default on the grounds not mentioned in the show cause notice. 5. A perusal of the pleadings indicates that respondent no. 2 bank had called for a forensic audit report from two different auditors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it-in-reply, have failed to demonstrate any compliance with regard to the issuance of show cause notice or an opportunity of being heard to the petitioners before declaring petitioner no. 1 s loan account as fraud. A perusal of the copy of the fraud declaration produced on record by the respondents by way of affidavit-in-reply indicates that the same has been passed mechanically, though the forensic audit reports do not establish any fraud. Learned counsel for the petitioners submitted that the fraud declaration is in breach of principles of natural justice and suffers from procedural impropriety, arbitrariness, and non-application of mind, which is evident from the copy of the fraud declaration dated 4th April 2020. 9. Learned counsel for the petitioners submitted that the two reports of forensic audit dated 19th October 2019 and 23rd December 2019, relied upon by the respondents opined that the petitioners account could not establish fraud. However, respondents issued the fraud declaration in the absence of any material and without even issuing any notice to the petitioners. The fraud declaration resulted in a drastic consequence of declaring the petitioners as willful defaulters ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ess dealings with each other. The allegations in the show cause notice regarding 12 crores being paid ₹ to the director Pragya Kela, has been specifically explained that such payment was never made, and thus out of the alleged payments credited of ₹14.79 crores, the sum of ₹12 crores was a mistake. The remaining transaction, worth ₹ 2.79 crores, was explained by the petitioners in their reply to the show cause notice. However, the bank proceeded on the basis of credit summations of ₹10.81 crores, which is illogical as in every defaulting borrower s account, credit summations are always reflected. Thus, it is submitted on behalf of the petitioners that legitimate business transactions are illogically treated to mean that though money was available, it was not utilized to discharge the loan amount. 11. Learned counsel for the petitioners thus submitted that the fundamental explanations were not considered by the review committee, and the order declaring the petitioners as willful defaulters was confirmed by giving the reason for round-tripping of funds, which was not an allegation in the show cause notice. Learned counsel for the petitioners submitted th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laring the petitioners as willful defaulters, learned counsel for the respondents submitted that the response of the petitioners was taken into consideration by WDIC Committee. He submitted that it is not in dispute that petitioners have committed default in repayment of loan amount. Inspite of giving adequate opportunities to the petitioners, before the fraud declaration and before declaring petitioners as willful defaulters, the petitioners failed to submit appropriate explanations on the allegations made against the petitioners. Thus, learned counsel for the respondents submitted that all the basic principles of natural justice were followed, and there is no illegality in the impugned fraud declaration and the impugned orders declaring the petitioners as willful defaulters. ANALYSIS: 16. We have considered the rival submissions made by both parties. It is not disputed that the fraud declaration is issued without giving an opportunity of hearing to the petitioners. Respondents were unable to place on record any document to indicate that any show cause notice with regard to the declaration of fraud was served upon the petitioners and that the copy of the fraud declaration was inti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... funds to the subsidiary companies and transaction of 12 crores for classifying ₹ the petitioners as willful defaulters in criteria 2.2.1 of the RBI s Master Circular. In the case of Govinda Industries Private Limited, the reasons recorded by WDIC refer to substantial funds available with the company and failure on the part of the company to repay the loan amount. However, it is the case of the petitioners that in the show cause notice issued to Govinda Industries Private Limited, there was no allegation of siphoning off or round-tripping of funds. 19. Hence, the petitioners submitted representation before the review committee. The minutes of meeting of the proceedings before the review committee again refer to same transactions as referred by WDIC. In the case of Immense Packaging Private Limited, the review committee observed that the company has routed sales of ₹10.81 crores against the net sales realization of ₹17.44 crores and had not given any justification for the shortfall in the credit summations. The review committee further observed that company accepted diversion of funds and submitted the transfers as transaction on behalf of the group companies which ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he case of Milind Patel squarely apply to the facts of both the petitions. It is a matter of record that the prima facie view taken by the bank in the show cause notice was not supported by any material supplied to the petitioners. Thus, the petitioners accused of being willful defaulters were unable to discharge their burden to prove their innocence. 22. The orders declaring the petitioners as willful defaulters results into serious civil consequences. Hence, the bank is under obligation to provide all the material relied upon to form prima facie opinion for calling upon the noticee to issue show cause. Thus, the orders passed in both petitions, declaring the petitioners as willful defaulters, suffer from a breach of principles of natural justice and thus are arbitrary, which deserve to be quashed and set aside. 23. The Hon ble Supreme Court in the case of SBI and others Vs. Rajesh has summarized the legal principles in paragraph 98 as under: 98. The conclusions are summarised below: 98.1. No opportunity of being heard is required before an FIR is lodged and registered. 98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... unt as fraud stands vitiated on account of breach of principles of natural justice. 25. However, we do not intend to foreclose the bank s opportunity for effective determination of allegations made by the bank in the show cause notice. Hence, the bank would be at liberty to make a proper disclosure of all the material and information based on which the show cause notices were issued for declaring the petitioners as willful defaulters. The petitioners, on being supplied with the necessary material, shall be entitled to submit a fresh reply to such show cause notice based on which a fresh draft order may be issued by the WDIC in accordance with the RBI s Master Circular and be served upon the petitioners to enable them to make their representation to the review committee, if necessary. Thus, after following the basic principles of natural justice and after giving an opportunity to be heard, the review committee shall pass a fresh order in accordance with law. 26. Regarding the declaration of fraud of the company s account, it would be open to the bank to initiate fresh proceedings after following the due procedure prescribed by the RBI s Master Directions on Fraud and the legal princ ..... 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