Case: Kailash Shahra Vs. Idbi Bank Limited

the Review Committee.41. The judgment of the Honble Supreme Court in the case of State Bank of India (supra), though not directly on the point, still, while negating the contention of the respondents that services of a lawyer ought to be mandatorily provided while meeting the allegations in the show cause notice, in para 24, the Honble Supreme Court clinched the issue and held as under:-"24. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the-in-house proceedings contained in Para 3 of the Revised Circular dated 1-7-2015, as it is clear that the events of wilful default as mentioned in Para 2.1.3. would only relate to the individual facts of each case. What has typically to be discovered is whether a unit has defaulted in making its payment obligations even when it has the capacity to honour the said obligations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilised for the specific purpose for which the finance was made available. Whether a default is intentional, deliberate, and calculated is again a question of fact which the lender may put to the borrower in a showcause notice to elicit the borrowers submissions on the same. However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that Para 3 of the Master Circular dated 1-7-2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following Para 3(b) of the Revised Circular dated 1-7-2015, must give its order to the borrower as soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 1-7-2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised Circular dated 1-7-2015. The impugned judgment is, therefore, set aside, and the appeals are allowed in terms of our judgment. We thank the learned Amicus Curiae, Shri Parag Tripathi, for his valuable assistance to this Court.42. There is no merit in the contention of Mr.Pandit that this judgment is delivered in the year 2019, whereas, the impugned decision is taken in the year 2017. The circular is of 2015. That has been interpreted by the Honble Supreme Court and also in a Division Bench judgment of this court. It is, therefore, no point telling us on affidavit in these proceedings that the petitioner is not prejudiced at all. True it is that the petitioner cannot demand, as of right, a fresh opportunity to appear before the Identification Committee or to give a reply to the show cause notice and place his version before the Identification Committee now. However, when tentative and prima facie findings of the Identification Committee as enumerated and recorded in its reasoned order are placed before the Review Committee, at least the petitioner must know what is the opinion of the Identification Committee. The petitioner must know how the order of the Identification Committee reads.43. The bank, in the affidavit in reply categorically says that it is not obliged to provide copies of the Identification Committee report and the Review Committee report to the petitioner as they are internal private documents. This cannot be a valid ground on which the petitioner is denied the copies of these two vital documents. That the petitioner had with him a copy of the special audit report and that was sufficient to answer the queries of the bank is thus an afterthought and is not a sound reason assigned in the affidavit in reply to deny the petitioner access to the relevant documents.44. We do not think that the petitioner intentionally avoided to attend the personal hearing. In the facts and circumstances of the case, the petitioner was genuinely handicapped. The petitioner had sought answers to several queries, some of which may be general and irrelevant. The petitioner need not be provided with names and designation of the members of the Identification Committee for its composition is set out in the Master Circular of the RBI itself. Apart therefrom, the designation by itself is not decisive. This hyper technical approach of the petitioner need not be countenanced, but when the petitioner says that there is no confidentiality attached to the orders an reports of the Identification Committee and that of the Review Committee, but Mr. Pandit says otherwise, then, we have a serious quarrel with the stand of the IDBI Bank Limited. Ordinarily, we would have been justified in setting aside the order of 8th December, 2017, but it would mean the benefit would accrue to all those proceeded against. We do not wish to do that.

Decision (1 = appeal accepted, 0 = rejected): 1

Explanation:
1[ds]10. Since the arguments before us are revolving around the adherence to the principles of natural justice, we do not wish to make detailed reference to the correspondence on record. All that we have is a grievance that the notice dated 8th December, 2017 informs the petitioner that the Review Committee has passed an order, inter-alia, against the petitioner, confirming that the Identification Committee has declared the borrower company along with its Directors as wilful defaulters and their names would be reported to the concerned credit institutions and the RBI.The show cause notice makes serious charges. A perusal of the same would reveal that the charges are under two broad heads, namely, that the unit has defaulted in meeting its payment/ repayment obligation to the lender and has not utilised the finance from the loan for the specific purpose for which it was availed of, but it has diverted the funds for other purpose. All acts of omission and commission are attributed to the borrower company. However, the notice is addressed to the Directors as well. The second head is of siphoning of funds and that the unit has defaulted in meeting its payment/ repayment obligations and has siphoned of all the funds so that the funds have not been utilised for the specific purpose for which the finance was availed of. Therefore, the petitioner amongst others was called upon to show cause why the company and the Promoter Directors, whole-time Directors should not be reported as wilful defaulters.A perusal of the same reveals that the bank asserts that it had extended an opportunity of personal hearing. After careful examination of the contents of the show cause notice, the Master Circular, the Wilful Default Committee issued an order recording the fact of the wilful default, which was reviewed and confirmed by another committee (Review Committee) of the bank constituted in accordance with the RBI Circular at its meeting held on 27th November, 2017. Based on the above, the bank has taken a decision to declare the petitioner as wilful defaulter.From the order, it is not revealed that any reference is made to a communication of 10th August, 2017 addressed to IDBI Bank Limited purportedly in reply or response to the show causeare not making reference to all these communications simply because the bank maintains that the subject audit report has been forwarded, whereas, the Ruchi Soya Industries Limited claims that it has not been forwarded. All that we have on record are the contents of these special audit reports, which are specifically relied upon. The borrower companys version is reiterated by the petitioner from time to time apart from his assertion that he was only a non-executive Director.With the above material, we must now note the stand of the bank in issuing the notice to the guarantors of the loan. The guarantors include the petitioner. The RBI Circular and which is the most relevant document has specific provisions to declare parties like the petitioner as wilful defaulter. The same has not been specifically annexed, but a copy is provided by Mr.Jain during the course of arguments.A perusal of the same would reveal that though the term ‘lender appearing in the circular covers all banks/ financial institutions to which any amount is due, it is specifically then saying that the dues must be on account of any banking transaction, including off balance sheet transactions such as derivatives, guarantee and letter of credit. The term ‘unit appearing in para 2.1 is to be taken to include individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In case of business enterprises, other than companies, banks/ financial institutions may also report the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise.Then, amended para 2.6 says that the bank should consider the track record of the individual company with reference to its repayment performance to its lenders and the guarantees furnished by the companies within the group on behalf of the wilfully defaulting units, if not honoured, then, they should also be reckoned as wilful defaulters. However, in connection with guarantors, a clarification in the parent circular is given. The clarification is that when the default is made by the principal debtor, the banker will be able to proceed against the guarantor/ surety even without exhausting the remedies against the principal debtor. That is clear from section 128 of the Indian Contract Act, 1872. As such, where a banker has made a claim on the guarantor on account of the default made by the principal debtor, the liability of the guarantor is immediate. In case the said guarantor refuses to comply with the demand made by the creditor/ banker, despite having sufficient means to make payment of the dues, such guarantor would also be treated as a wilful defaulter. The default, however, should occur after the date of issuance of theis apparent from a perusal of these paragraphs that in addition to the penal measures, the wilful defaulters must suffer the consequences following the definitions and the details set out in the ingredients of this circular. It is evident that the whole process must go by the mechanism for identification of wilful defaulters.Therefore, it is this aspect of the matter which is relevant for our purpose. It is true that there is a power to pronounce even a Director as a wilful defaulter and that such a declaration is not confined to the borrower company alone. Firstly and importantly, a mere default is not enough. Secondly, only an intentional, deliberate act brings in the Declaration. Lastly and thirdly, other than the borrower company, its promoter/ whole-time Director can be subjected to such a declaration, but for that there should be evidence. The other Director is covered only when clause (d) of para 3 is attracted. However, there ought to be established and proven acts attributable to each, before such a drastic step is taken. To our mind, therefore, some of the documents and records may be relevant for enabling the Director like the petitioner to effectively defend himself. Further, before a personal hearing is granted to him, he should be aware of the allegations in the show cause notice with specific details so that he is able to recollect or the bank is in a position to refresh his memory. It will then alone be able to establish whether there is any consent with the acts of omission and commission of the borrower company by such Director. That he has participated in the meeting and that when the proceedings are recorded in the minutes of the meeting of Board, this gentleman has not recorded his objection to the same in the minutes or, the wilful default had taken place with his consent or connivance. This is therefore, understood by a Division bench of this court to mean that the Master Circular has an inbuilt mechanism. The inbuilt mechanism or safety valve is that the identification of the wilful defaulter is to be done in accordance with the Master Circular. Secondly, after the identification is done, a show cause notice has to be issued based on the order of the Identification Committee and which must be a reasoned order. After that show cause notice is issued, an opportunity has to be given to deal with the allegations in the show cause notice. The materials then have to be placed before a Review Committee and as and when that Review Committee applies its mind and gives its approval to the order of the Identification Committee that a finality is attached to it.The judgment delivered in the case of Finolex Industries (supra), with great respect, rightly concludes that this Master Circular contemplates a two stage inquiry by the bank.We respectfully concur with the above views. The whole exercise is not a mere ritual nor the paras are to be chanted as mantras. The presence of the word evidence is crucial.We do not see any substance in the argument of Mr.Pandit that in this case the Master Circular need not be given an interpretation as placed by the Honble Supreme Court in a decision of the year 2019 [State Bank of India (supra)]. As early as on 24th August, 2011, this court interpreted the Master Circular in Finolex case (supra). Therefore, it was always the understanding of this court that this Master Circular to be implemented, enforced and imposed effectively and efficiently requires compliance with the principles of natural justice. True it is that mere allegation of breach of principles of natural justice is not enough. The breach will have to be established and proved. The findings in the order of the Identification Committee may be tentative and prima facie and no finality is attached to it unless a review of the same by a high power committee is taken. But, at least at that stage, it is necessary that principles of natural justice are complied with. The paragraphs of the circular, therefore, are interpreted by the banks to conclude that no breach occurs of such principles even if the relevant and germane materials are withheld and the version of the alleged wilful defaulters is not taken into consideration or brushed aside by the Review Committee. These are not empty formalities. There is no paper compliance contemplated by law. A serious deliberation and due consideration is required at the hands of this high power committee. It must identify the wilful defaulter all over again and afresh by bearing in mind the definitions in the Companies Act, 2013, particularly of the term officer in default. There has to be a clear default attributable to the Director. If he is not a whole-time Director, then, there is a requirement in the definition itself of alleging, establishing and proving his consent by not raising any objection and by active participation in deliberations and discussions of the Board of Directors of that particular company. In the event there is a case made out of collusion, then, details, particulars of the same are required to be referred to and thereafter, the allegations should be established and proved with cogent and satisfactory materials. The reasons assigned by the Identification Committee are open for independent scrutiny of the the Review Committee.There is no merit in the contention of Mr.Pandit that this judgment is delivered in the year 2019, whereas, the impugned decision is taken in the year 2017. The circular is of 2015. That has been interpreted by the Honble Supreme Court and also in a Division Bench judgment of this court. It is, therefore, no point telling us on affidavit in these proceedings that the petitioner is not prejudiced at all. True it is that the petitioner cannot demand, as of right, a fresh opportunity to appear before the Identification Committee or to give a reply to the show cause notice and place his version before the Identification Committee now. However, when tentative and prima facie findings of the Identification Committee as enumerated and recorded in its reasoned order are placed before the Review Committee, at least the petitioner must know what is the opinion of the Identification Committee. The petitioner must know how the order of the Identification Committee reads.The bank, in the affidavit in reply categorically says that it is not obliged to provide copies of the Identification Committee report and the Review Committee report to the petitioner as they are internal private documents. This cannot be a valid ground on which the petitioner is denied the copies of these two vital documents. That the petitioner had with him a copy of the special audit report and that was sufficient to answer the queries of the bank is thus an afterthought and is not a sound reason assigned in the affidavit in reply to deny the petitioner access to the relevant documents.We do not think that the petitioner intentionally avoided to attend the personal hearing. In the facts and circumstances of the case, the petitioner was genuinely handicapped. The petitioner had sought answers to several queries, some of which may be general and irrelevant. The petitioner need not be provided with names and designation of the members of the Identification Committee for its composition is set out in the Master Circular of the RBI itself. Apart therefrom, the designation by itself is not decisive. This hyper technical approach of the petitioner need not be countenanced, but when the petitioner says that there is no confidentiality attached to the orders an reports of the Identification Committee and that of the Review Committee, but Mr. Pandit says otherwise, then, we have a serious quarrel with the stand of the IDBI Bank Limited. Ordinarily, we would have been justified in setting aside the order of 8th December, 2017, but it would mean the benefit would accrue to all those proceeded against. We do not wish to do that.