Case: Kailash Shahra Vs. Idbi Bank Limited

4. The petitioner before this court is a senior citizen residing at Mumbai. He was a non-executive, according to him and non full time Director of one Ruchi Soya Industries Limited, a public listed company having its registered office at Goregaon (East), Mumbai – 400 065.The respondent is a company incorporated and registered under the Companies Act, 1956 and carrying on banking business. It is carrying on this business from the branches established within the States of India. Its banking business is covered by the Finance Act, 1949.The petitioner says that he was not involved in any key decision making and day to day operations of the company. He had not attended any meeting with consortium member banks or joint lenders forum or steering committee or auditors of the borrower company and had never dealt with any customer/ client of the borrower company. The petitioner says that the borrower company had availed various credit facilities and had also made repayment of substantial amounts resulting in renewal and extension of the facilities, but beyond the documents executed by the borrower company, the petitioner is proceeded against only because he executed a deed of guarantee dated 15th May, 2013 providing his personal guarantee towards the repayment obligations of the borrower company pursuant to the loan agreement dated 15th May, 2013.In July, 2017, the petitioner received a show cause notice. That notice is dated 25th July, 2017. That is issued by the respondent bank alleging that in view of the defaults committed by the borrower company, it has been decided by the respondent bank that the name of the borrower company and its Directors would be reported to the Reserve Bank of India (RBI) and others for inclusion in the list of wilful defaulters. Thus, the petitioner was called upon to show cause as to why his name should not be reported as wilful defaulter. The borrower company objected to this show cause notice by its reply of 10th August, 2017. It raised various contentions, including making a request for providing details of Identification Committee report along with copies of all documents relied upon by the Identification Committee to enable the borrower company to suitably respond to the allegations made in the show cause notice. Exhibit ‘C is a copy of this reply dated 10th August, 2017. The petitioner neither received any response from the bank nor the borrower company. In other words, assuming that this was a joint request of the petitioner and the borrower company, the petitioner expected a reasonable response so that the show cause notice and the allegations could be contested. Therefore, the petitioner filed a reply to the notice on 18th August, 2017 denying the allegations therein. The petitioner pointed out that he had only been a Nominee Director on the Board of Directors and that from 2001, he has neither been involved in the day to day business nor was he aware of the defaults with respect to repayment of loans by the borrower company. He disputed his declaration as a wilful defaulter on the ground of lack of information and evidence available before the Identification Committee and urged that he must be provided with said information and documents and thereafter, be granted a personal hearing before the Identification Committee.The respondent bank replied to this communication on 22nd September, 2017, inter-alia, contending that the committee was constituted, but it is the petitioner who is responsible for not obtaining the relevant documents. In any event, it is stated that the petitioner was having the necessary documents in his possession as also the information and the petitioner was informed about the personal hearing that was scheduled to be held on 5th October, 2017.Exhibit ‘F is a copy of the letter dated 4th October, 2017 issued by the borrower company. It says that the borrower company had requested the bank to postpone the hearing or reschedule it. The personal hearing was thus rescheduled on 2nd November, 2017. Prior to it, there was correspondence between the borrower company and the bank. It appears that the personal hearing was rescheduled. Yet, there was a reply, for at that personal hearing, the borrower company and its Directors were not present. Thus, the grievance is that though there is an audit carried out by M/s. G.D.Apte and Company, there are other documents, based on which, the allegations in the show cause notice are made and in these circumstances, the copies of the relevant documents, together with the right to inspect the originals should have been allowed.When this petition was placed before us on previous occasion, the affidavit of the bank was called for on specific grounds. An order to that effect is passed and on 14th August, 2019, this court observed asLet Mr. Pandit take instructions, particularly on the point raised by Mr. Jain, appearing for the petitioner, that the petitioner has not been supplied with a copy of the order passed by the Identification Committee. The petitioner says that such an order has to be then placed before the Review Committee in terms of the Master Circular and the Review Committee also must pass its order based on independent satisfaction. It is stated that copies of these orders are not supplied to the petitioner. The petitioner is informed that these are confidential documents and cannot be supplied.We inquired from Mr. Pandit as to on what basis the affidavit in-reply, at running page 235 (internal page 21, in para 30) says that the Review Committees report being an internal and confidential document, same is not required to be served on the petitioner. In the same way, it is also said in the preceding paragraph that declaration of the petitioner as wilful defaulter does not suffer from any mala fides. The petitioner has no document such as the copy of the final order or the declaration so as to infer from it that the same is not mala fide. It is only when the petitioner is not supplied with such documents that the petitioner can make the allegation of this nature.The above being a very serious allegation and in the backdrop of the assertion of the respondent that the reports of the Identification Committee and the Review Committee are internal private documents and were not made available to the borrower, that we called upon Mr. Pandit specifically because under challenge is a communication, copy of which is at Exhibit-B, running pages 44 & 45 of the paper-book. That refers to the Master Circular on Wilful Defaulters issued by the Reserve Bank of India and the show cause notice dated 25-7-2017. It specifically says that the Wilful Defaulter Committee issued an order recording the fact of the petitioner being a wilful defaulter, which was reviewed and confirmed by another Committee (Review Committee) of the Bank constituted in accordance with the Circular, at its meeting held on 27-11-2017.It is based on the above that the Bank has taken adecision to declare the petitioner as a wilful defaulter. Thus, the orders of the Wilful Defaulter Committee and that of the Review Committee are not made available to the petitioner and that is stated to be private and confidential.We list this matter on 3-9-2019 for passing orders.We had placed this matter under the caption for passing orders so that Mr.Pandit appearing for the respondent can outline the banks response and stand essentially on the ground of alleged breach of principles of natural justice. However, Mr.Pandit has been instructed to state that beyond the affidavit in reply and the stand taken therein, the bank does not want to say anything, much less agree with the petitioner that a fresh opportunity should be extended to him.

Court's reasoning:
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.