The Calcutta High Court reiterated that the proceedings under the Master Circular of the RBI guidelines for dealing with wilful defaults of corporate entities, being essentially in the nature of in-house proceedings and of an administrative character, cannot permit legal representation.
Factual Background
The challenge in this writ petition is to a notice issued by the respondent State Bank of India to the petitioners by which the petitioners have been called upon to show cause and make submissions in writing within 30 days from the date of receipt of the notice as to why their names should not be included in the list of wilful defaulters as per the Reserve Bank of India (RBI) Guidelines.
The petitioners claim to be the erstwhile promoters/directors of Mohan Motors Udyog Private Limited (the Company) which is presently in a Corporate Insolvency Resolution Process (CIRP) under the relevant provisions of the Insolvency and Bankruptcy Code 2016 (IBC).
Arguments on behalf of the petitioners
The Counsel on behalf of the petitioners submitted that by reason of the moratorium under section 14 of the IBC being operational in respect of the Company, proceedings under the master circular of the RBI for being declared as wilful defaulters should be stayed during the operation of the moratorium period.
It was submitted that the impugned Show Cause Notice dated 14th November, 2019 and the notice of hearing dated 6th August, 2020 are bad by reason of the fact that they have not been issued by the committee which is empowered to do so under the RBI Master Circular on Wilful Defaulters, 2015.
The Counsel submitted that the notice does not disclose the particulars of the “appropriate committee” which has allegedly examined the conduct of the account and the credit facilities of the Company and also fails to disclose the particulars of the alleged meeting where the conduct of the Company has been examined.
Relying on Atlantic Projects Limited v. Allahabad Bank, it was submitted that clause 3(b) requires application of mind by the Identification Committee “at all stages” before a show-cause notice can be issued on a defaulting borrower.
Arguments on behalf of the respondents
Relying on a division bench judgment of Union Bank of India v. Sudhir Kumar Patodia/Pawan Kumar Patodia, which overruled the Atlantic Projects case, the counsel on behalf of the respondent contended that even if the power to issue a show cause notice has been delegated, the notice itself would not be invalidated.
Furthermore, the counsel submitted that ratification of an act subsequent to its commission also has legal backing, as the case of Maharashtra State Mining Corporation v. Sunil is an authority in the same regard. Therefore, the show cause notice can be approved anytime by the Identification Committee.
Observations of the Court
Identifying the core issue, the Court framed the following two points for consideration -
Whether the Company and the petitioners can be subjected to proceedings for identification of Wilful Defaulters under the RBI Master Circular, 2015 in the face of the ongoing CIRP under the Insolvency and Bankruptcy Code, 2016?
While dealing with the first issue, the Court observed that it is clear from reading of section 14(3)(b) that the prohibition on institution or continuation of suits and other proceedings against the corporate debtor do not extend to a surety. It is undisputed that both the petitioners are erstwhile guarantors of the Company, namely, the corporate debtor.
The Court observed that the petitioner’s argument that section 29-A or 31 would provide a shield against the operation of section 14(3)(b) and that the petitioners would come under the immunityblanket of section 14 is contrary to the law governing insolvency resolution process and the RBI guidelines for dealing with wilful defaults of corporate entities.
“Although State Bank of India vs. Jah Developers (P) Ltd. (2019) 6 SCC 787 threw a light on the harsh consequences of being declared a wilful defaulter, it was a decision on whether legal representation can be permitted before a declaration of wilful default is made. The Supreme Court held that the proceedings under the Master Circular, being essentially in the nature of in-house proceedings and of an administrative character, cannot permit legal representation.”
Finally, the Court held that there was no defect in the act of issuing the impugned Show Cause Notice by reason of the composition of the issuing authority under the guidelines
Validity of the impugned Show-Cause Notice on the ground that the said notice does not comply with the RBI guidelines relating to wilful defaults by an entity as expressed in the Master Circular which is binding on the respondent Bank.
While considering the second point, wherein the petitioner has claimed that the Show Cause Notice is against the mandate of the Master Circular in terms of the composition/constitution of the Committee which has been empowered to identify wilful defaulters, the Court perused Clause 3(a) of the Master Circular and observed that the said clause specifies the composition of the Committee which is entrusted with the task of first identifying and then examining the evidence of wilful default. On reading the said clause along with the Show Cause Notice, the Court held that the first contention with regard to an improperly constituted Committee under a Deputy Managing Director instead of the recommended Executive Director doesn’t have any substance.
Whether the appointed Committee applied its mind or making such non-application evident in the Show Cause Notice thus rendering it vulnerable?
The petitioners contend that the impugned Notice is devoid of any indication that the ‘appropriate Committee’ has applied its mind to the materials which would identify the petitioners for the purposes of the Show Cause Notice. Regarding this issue, the Court read the impugned notice in light of the mandate of Clause 3(b) of the Master Circular of RBI and postulated the following two questions:
1. Is it necessary for a Show Cause Notice to disclose the basis of the conclusion arrived at by the Committee under clause 3(a)?
While entertaining this question, the Court observed that the clause does not mandate that the Show Cause Notice must disclose the basis of the satisfaction of the concerned Committee or the conclusion arrived at from the evidence before it, rather the clause 3(a) requires that the Committee and its members must “examine” the evidence of wilful default of a borrower before proceeding to sub-clause (b). Clause 3(b) comes at the stage of completion of examination of the available evidence whereupon the Committee may or may not conclude that an event of default has occurred. If it does, only then will it take steps for issuing a Show Cause Notice under the said clause.
2. If yes, then how can such an application of mind/formation of opinion be made apparent on the face of the Show Cause Notice?
The Court held that the contention of the petitioners of the impugned Notice being devoid of any indication of application of mind by the Committee was not acceptable on two grounds.
First, the Master Circular does not require it and more important, the Annexure to the Show Cause Notice coupled with the Resolution of the Committee dated 17th June, 2019 provides sufficient material (and particulars specific to the Company of which the petitioners are guarantors) to satisfy that the Committee had indeed fulfilled its mandate under both sub-clauses (a) and (b) of clause 3.
Secondly, one of the most obvious ways in which working of the mind or some sort of deliberation by the persons concerned can be shown is by articulation of the findings arrived at with reference to a meeting (including of minds) where such deliberation palpably took place and the findings being relatable to the materials/evidence before the Committee entrusted with the duty to sift through the evidence to come to the conclusions.
Relying on The Secretary, Ministry of Defence vs Prabhash Chandra Mirdha; (2012) 11 SCC 565, the Court held that a Show Cause Notice does not give rise to a cause of action unless a strong case of abuse of process is made out.
The Court, while referring to the division bench judgment of Union Bank of India v. Sudhir Kumar Patodia/Pawan Kumar Patodia, reiterated that the Show Cause Notice need not reflect the decision taken by the concerned committee effectively takes care of both the points urged by the petitioners in this case with regard to clause 3 of the Master Circular.
Whether the petitioners have suffered any prejudice by issuance of the impugned Show Cause Notice?
The Court in this regard, observed that since there is a two-tier system of identification where the decision of the Identification committee is subject to review by another Identification Committee, no finality is attached to the decision of the first/identification Committee and more so at the stage of a Show-Cause Notice.
The court also observed from the trail of correspondence that the petitioners were initially not averse to appearing before the concerned Committee for making their submissions with regard to the impugned show-cause notice.
In view of the above submissions and considerations, the Court dismissed the petition challenging the impugned Show Cause Notice and denied the reliefs sought by the petitioner.
Case Details
Name of the case: Sandip Kumar Bajaj & Anr. Vs. State Bank of India & Anr.
Delivered on: 15.09.2020
Coram: Justice Moushumi Bhattacharya
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