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TMI Blog2024 (10) TMI 1469X X X X Extracts X X X X X X X X Extracts X X X X ..... ad been classified or categorized as fraud under the same Master Directions on Fraud by the RBI and after examining a plethora of case laws on the subject, it was held that the principles of natural justice have to be read, while interpreting and enforcing the Master Directions on Fraud by the RBI. There is no gainsaying that the civil consequences jeopardize the future of the business of the borrower, and the principles of natural justice necessitate providing an opportunity for a hearing before declaring the borrower ineligible to access institutional finance under Clause 8.12.1 of the Master Directions on Frauds. The present writ petition is allowed and the impugned order dated 20.06.2019 passed by the respondent-bank and the consequential action declaring, classifying or categorizing the petitioner as fraud is hereby set aside/quashed. - HON'BLE MR. JUSTICE DHARMESH SHARMA For the Petitioner Through: Mr. Vaibhav Mishra, Mr. Ekansh Mishra and Mr. Jayant Chawla, Advs. For the Respondent Through: Mr. Kush Sharma, Standing Counsel with Mr. Asiya Khan, Mr. Nishchaya Nigam and Mr. Vagmi Singh, Advs. JUDGMENT 1. The petitioner has invoked the extraordinary writ jurisdiction of t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sidiaries were found viz. M/s. Moser Baer Phot Voltaic Limited (presently known as Helios Photo Voltaic Limited ) in 2005 and MBSL in 2007. 3. The petitioner further states that, at one point, MBIL s solar business valued at over US$ 1 billion in the year 2007, and there were several financial institutions which had made investments in the project. However, the global financial crisis in the year 2007, compounded by the Government of India s failure to curb dumping by certain foreign countries or to impose substantial duties, significantly impacted MBIL s financial stability and that of its subsidiaries. Consequently, in 2011-12, MBSL approached the Corporate Debt Reconstruction Cell of the RBI [Reserve Bank of India] and pending consideration of the Flash Report by the bank or consortium banks, a debtor-creditor agreement was entered into with the banks and debtor and in the meanwhile TEV [Techno Economic Viability] report was sought from an independent agency to a conduct stock audit of the company. Eventually CDR-EG [Corporate Debt Restructuring-Empowered Group] , a Master Restructuring Agreement [ MRA ] and a Trust and Retention Agreement [ TRA ] were drawn, deliberated and sig ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and a TRA dated 05.06.2013 (also amended on 27.05.2014) between the MBSL and the banks, including the respondent-bank, all occurring after the petitioner s departure from the Moser Baer Group. The petitioner emphasizes that, during the aforesaid period, the banks, including the respondent-bank, did not identify any acts of fund diversion by the company, its directors, or promoters. Otherwise, they would have classified MBSL in the C or D category, which relates to events of wilful default. 6. The petitioner claims that, based on his inquiries, the CDR efforts began to decline from 26.10.2016 onwards due to the banks decision to exit these revival efforts. In 2017, proceedings under Section 7 of the IBC [Insolvency and Bankruptcy Code, 2016] were initiated by the financial creditors of MBSL, which was admitted by the NCLT [National Company Law Tribunal] on 14.11.2017. Subsequently, liquidation proceedings were initiated by the NCLT vide order dated 30.05.2019, appointing Mr Arvind Garg as Liquidator. 7. The petitioner subsequently received a Show Cause Notice [ SCN ] dated 13.03.2020 from the respondent inter alia alleging that during the relevant period as on 31.03.2015, 2018 and 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Delhi, in the year 2007 and on 14.10.2012, its account became NPA [Non-Performing Asset]; and forensic audit was conducted by M/s. Haribhakti Company, which made the following revelations: a. In terms of the RBI guidelines and in order to ensure that no leakage of revenue, the MBSL is allowed to operate and maintain accounts only with the banks under consortium members. The sale proceeds generated from the business/working capital funds lent were not deposited with the complainants/ lending institution! CDR lenders are were routed through banks outside the complainants/ lending institutions/ CDR lenders thereby indicating the fraudulent intentions for siphoning of funds. b. The MBSL instead of utilising an amount towards repayment of lenders' dues invested a sum of Rs. 696.51 crores in Helios Photovoltaic Limited, a related company, which had been booking losses since 2011-2012, Helios Photovoltaic Limited(hereinafter referred as HPVL ) is a group concern and is being managed and looked after by related persons. Deepak Puri and Nita Puri arc the directors of the said company. The gross assets as on 31st March 2015 of Helios Photovoltaic Limited were only to the extent of Rs. 4 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ese findings, both the companies MBIL and MBSL were classified as fraud on 20.06.2019 and reported to the RBI on 08.07.2019. It is further pointed out that a complaint was preferred by the consortium of banks, including the respondent-bank, against the companies and their directors, alleging acts of fraud and cheating, resulting in wrongful gain to themselves and wrongful loss to the lenders. Subsequently, an FIR was registered bearing No. RC2232020A0002 on 25.06.2020. 11. The petitioner filed rejoinder to the aforesaid counter-affidavit which is dated 15.07.2024, in which it was brought out that the petitioner instituted W.P.(C) 4128/2023 titled as Ratan Puri v. Bank of Baroda assailing the order dated 23.03.2023 passed by the Review Committee of the bank, confirming the order passed by the Identification Committee declaring the petitioner as wilful defaulter under the Master Circular on Willful Defaulter, 2015 issued by the RBI. It is pointed out that the aforesaid writ was decided vide judgment dated 01.03.2024 in favour of the petitioner and categorization of the petitioner as wilful defaulter was struck down/quashed for the same being not only in derogation to the Master Circu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... al institution [Para 2.5(a)]. (b) Entrepreneurs/Promoters would be barred from institutional finance for a period of 5 years [Para 2.5(a)]. (c) Any legal proceedings can be initiated, including criminal complaints [Para 2.5(b)]. (d) Banks and financial institutions to adopt proactive approach in changing the management of the wilful defaulter [Para 2.5(c)]. (e) Promoter/Director of wilful defaulter shall not be inducted by another borrowing company [Para 2.5(d)]. (f) As per Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot be a resolution applicant. 50. In addition to the above consequences, borrowers are also liable to suffer the following consequences under the Master Directions on Frauds: 50.1. No restructuring may be made in the case of an RFA or fraud accounts (Clause 8.12.2). 50.2. No compromise on settlement involving a fraudulent borrower is allowed unless the conditions stipulate that the criminal complaint will be continued (Clause 8.12.3). 50.3. The above consequences show that the classification of a borrower's account as fraud under the Master Directions on Frauds has difficult civil consequences for the borrower. The classificatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that debarring borrowers from accessing institutional finance is necessary to not only prevent the same persons from committing frauds in other banks, but also to proscribe banks from dealing with unscrupulous borrowers in public interest. Debarring a borrower under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrower for being untrustworthy and unworthy of credit by the banks. This Court has consistently held that an opportunity of a hearing ought to be provided before a person is put on a blacklist. 62. Classification of a borrower's account as fraud has the effect of preventing the borrower from accessing institutional finance for the purpose of business. It also entails significant civil consequences as it jeopardises the future of the business of the borrower. Therefore, the principles of natural justice necessitate giving an opportunity of a hearing before debarring the borrower from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds. The action of classifying an account as fraud not only affects the business and goodwill of the borrower, but also the right to reputation. 15. Thus, it was held by the Su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions of the directions to save them from the vice of arbitrariness. 16. In view of the foregoing discussion, reverting back to the instant matter, at the cost of repetition, none of the tenets of the principles of natural justice were adhered to in the present matter before passing the impugned order dated 20.06.2019 classifying the petitioner as fraud . Therefore, without further ado I find that the present writ petition should be allowed. 17. Accordingly, the present writ petition is allowed and the impugned order dated 20.06.2019 passed by the respondent-bank and the consequential action declaring, classifying or categorizing the petitioner as fraud is hereby set aside/quashed. Further, in view of the decision of the Co-ordinate Bench in the aforesaid two writ petition viz., W.P.(C) Nos. 9491 of 2023 and 4128 of 2023, it is also directed that no grounds ever existed for declaring, classifying or categorizing the petitioner as fraud on account of non-payment of institutional loans on the part of the MBSL. 18. Resultantly, the respondent-bank is directed to take appropriate measures to ensure that the name of the petitioner classified as fraud is removed from the Central Fraud Reg ..... X X X X Extracts X X X X X X X X Extracts X X X X
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