Case: Randhir Shivajirao Naik &amp; Anr Vs. Reserve Bank of India &amp; Ors

5. The matter was first moved on 28th June 2021 (S.C. Gupte and M.S. Karnik, JJ.). This is the order that came to be passed on that day:-Heard learned Counsel for the Petitioners and learned Counsel for Respondent No.2-bank as well the Resolution Professional, representing Respondent No.3-company.2. The Petitioners were Directors on the board of Respondent No.3-company. They have been suspended from acting as directors, being classified as wilful defaulters by Respondent No.2- bank as per Reserve Bank of India (RBI) guidelines. It is, principally, the case of the Petitioners that RBI guidelines used by Respondent No.2 for the impugned action do not apply to non-scheduled urban banks. Learned Counsel for Respondent No.2 seeks time to take instructions and file, if necessary, a suitable reply to the petition.3. In the meantime, learned Counsel for Respondent No.2, on instructions from his client, offers not to publish the status of the Petitioners as wilful defaulters till the next date. The immediate controversy, for which the Petitioners have moved this court, concerns revival of Respondent No.3 before NCLT. The Resolution Professional, representing Respondent no.3 in the present petition, is in the process of receiving proposals for such revival. The Petitioners themselves are interested in such revival and intend to submit a proposal for the same to the Resolution Professional. Learned Counsel for Respondent No.3 submits that as of now the Resolution Professional has decided to accept the proposal, if any, emanating from the Petitioners for reconstruction of Respondent No.3-company, but that the same shall be subject to further orders that may be passed by this court as well as NCLT. Considering the stand adopted by Respondent No.3, through the Resolution Professional, and the statement made by Respondent No.2, no further orders need to be passed at this stage.4. We, accordingly, stand over the petition to 12 July 2021 to enable Respondent no.2 to take instructions and file reply, if any.4. Issue notice to Respondent No.1-Reserve Bank of India returnable on 12 July 2021. Humdast permitted. In addition to court notice, Respondent No.1 may be served through a private notice and an affidavit to that effect may be filed in court by the next date.6. Affidavits in Reply have been filed by all the Respondents. There is some discrepancy in the page numbering in the Court record.7. The facts have been briefly noted in the order of 28th June 2021. Although we do not think a longer delineation is necessary, we will refer to the relevant dates.8. The 2nd Respondent is admittedly a NonScheduled Urban Co-operative Bank or UCB. On 2nd February 2021 it issued a show cause notice to the Petitioners calling upon them to show cause within 30 days why they should not be classified as wilful defaulters according to RBI guidelines. The Petitioners replied and showed cause. In that reply on 9th March 2021, the Petitioner specifically raised the question of whether the 2nd Respondent could even issue such a notice.9. In the meantime, the 3rd Respondent found itself before the NCLT. A moratorium was imposed on it under section 14 of the Insolvency and Bankruptcy Code 2016. In those NCLT proceedings, on 30th April 2021 a second meeting of the Committee of Creditors was held. The Resolution Professional appointed of the 3rd Respondent asked the representatives of the 2nd Respondent bank if they are already declared the Petitioners as defaulters. Apparently, the 2nd Respondents officers said that they have not done so until then but might do so shortly after. This was before the Petitioners were given any hearing.10. On 9th June 2021, a wilful defaulter Identification Committee of the 2nd Respondent bank proceeded to declare the Petitioners as wilful defaulters.11. This Petition was filed in June 2021.12. The statutory regularity conspectus is governed by Reserve Bank of Indias Master Circulars. One is dated 1st July 2014 and two are dated 1st July 2015. Copies of these are annexed inter alia to the Petition as also to the affidavit in reply of the Reserve Bank of India, which has copies of the correctly applicable circulars. They are at Exhibits I, II and VI of the RBI affidavit. The RBI is also represented before us today by Mr Shenoy.

Reasoning: 14. Nobody before us challenges these circulars, as indeed none can.15. Then, also in paragraph 8, the RBI has stated that instructions on reporting of information pertaining to Wilful Defaulters to RBI have been issued to Scheduled Co-operative Banks. This has been done by circulars dated 30th June 1999, 1st August 2002 and 24th June 2008 (copies of which are also annexed).16. These instructions, according to the RBI, have been consolidated in paragraph 5.4 of the Master Circular on Management of Advances which is dated 1st July 2015 and a copy of which is at Exhibit VI. We turn to that immediately. Paragraph 5.4 deals with collection and dissemination of information on cases of wilful default of Rs.25 lakhs and above. Clause 5.4.1 speaks of, and only of Scheduled UCBs.17. Mr Jahagirdar for the 2nd Respondent evidently has a difficult task before him. He has to carefully negotiate the tightrope between defending his clients position on the one hand and avoid antagonising the top-most banking regulator, the RBI, on the other. His clients have interpreted the RBI circulars as being applicable to them, although they are Non- Scheduled UCBs. The 2nd Respondent clearly cannot go against the RBI for reasons they are self-evident. Once, therefore, the RBI has said that these master circulars are not applicable to Non-Scheduled UCBs such as the 2nd Respondent, the matter must surely end at that and the Petition must succeed.Clause 5.3.3 is a requirement that that all UCBs are required to submit a quarterly list of suits filed of accounts of Rs.1 Crore and above, classified as doubtful or loss, to CIBIL and/or any other credit information company which has obtained CoR from RBI and of which the UCB is a member. But this is a matter of reporting information and is not the same as being empowered to decide or adjudicate whether a person is wilful defaulter.19. Similarly clause 5.3.4 says that all UCBs are required to submit a list of suit filed accounts of wilful defaulters of Rs. 25 lakhs and above as at the end of four quarters to CIBIL or any other credit information company etc. Again this is an information-gathering process. It cannot be read to invest a Non-Scheduled Bank with declaratory powers.20. Clause 5.3.7 then says that banks may make enquiries, if any, about the defaulters from the reporting bank/financial institution. But to ask is one thing; to decide is quite another.We fail to appreciate how this can possibly assist the 2nd Respondent in its submission that it is in fact invested with the necessary declaratory powers.22. As we noted earlier, now that the RBI has made its stand abundantly clear, it is impossible to sustain the actions by 2nd Respondent either in issuing the show cause notice or in issuing the order that followed.