Kanchan Motors And 2 Ors vs Bank Of India And 6 Ors
2018 Latest Caselaw 1189 Bom

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         IN THE HIGH COURT OF JUDICATURE AT BOMBAY
             ORDINARY ORIGINAL CIVIL JURISDICTION

                   WRIT PETITION (L) NO.2072 OF 2018

M/s. Kanchan Motors and Others                              ...Petitioners
           vs.
Bank of India and Others                                    ...Respondents

Mr. Nakul Jain a/w. Mr. Mayank Bagla and Mr. Durgesh Kulkarni
I/b. Mr. Jainish Jain, for the Petitioners
Ms. Purnima Pandit, for Respondent Nos. 1 and 5.

                                CORAM :  SHANTANU KEMKAR &
                                         N. W. SAMBRE, JJ.

                                DATE :   JULY 12, 2018

ORDER

.              Parties through their counsel.



2.             Rule.

3. With consent heard and finally disposed of.

4. The Petitioners claim that they are in the business of

selling and purchasing of Tata Vehicles motorship. They availed

credit facilities from the first Respondent Bank of India (for short

"the Bank"). The case of the Petitioners is that due to unavoidable

circumstances, they could not make the repayment of the

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outstanding dues of the Bank. In the circumstances, the

Respondent Bank had issued a notice to the Petitioners on 16 th

November, 2017 calling upon the Petitioners to pay outstanding

amount of Rs. 2,62,28,830/-. Thereafter, in pursuance of it the

Bank had filed Original Application before Debt Recovery Tribunal

at Mumbai (in short D.R.T.) which is pending before the D.R.T.

5. During the pendency of the said matter before D.R.T.,

the Chief Manager of the Bank issued a show cause notice dated

29th December, 2017 to the Petitioners intimating their intention to

initiate proceeding for declaring the Petitioners as "Willful

Defaulter". On receipt of the said notice, the Petitioners submitted

their reply dated 29th January, 2018 stating therein as to why the

action of declaring the Petitioners as Willful Defaulter is not

warranted and that as to why the Petitioners will not come within

the purview of "Willful Defaulter" as provided under the RBI

Guidelines. The Petitioners also requested for providing of an

opportunity of personal hearing.

6. According to Petitioners without considering the said

reply dated 29th January, 2018 and without giving any opportunity

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of personal hearing to the Petitioners, the Identification Committee

of the Bank vide order dated 9th March, 2018 declared the

Petitioners as the "Willful Defaulter". The said order was confirmed

by the Review Committee of the Bank (Fifth Respondent) vide order

dated 20th April, 2018 (Exhibit "B"). Feeling aggrieved by both the

orders the Petitioners have filed this Petition under Article 226 of

the Constitution of India.

7. Mr. Nakul Jain, the learned counsel for the Petitioners

has argued that the impugned order dated 9th March, 2018 passed

by the Identification Committee as also the order dated 20 th April,

2018 passed by the Review Committee are in contravention to the

procedure prescribed by the Reserve Bank of India vide Master

Circular dated 1st July, 2015. He submits that before passing

impugned order declaring the Petitioners as Wilful Defaulter, a

show cause notice was required to have been issued to the

Petitioners and after considering the Petitioners' submissions, the

order recording the fact of wilful default committed by the

Petitioners by giving reasons for the same could have been passed.

He also submits that it was also necessary for the Identification

Committee to have given an opportunity to the Petitioners for

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personal hearing before passing such order. The said procedural

requirement which is in consonance with the principles of natural

justice having not been fulfilled by the Identification Committee,

the order of the Identification Committee deserves to be set aside.

He further submits with even while confirming the said order of the

Identification Committee, the Review Committee has not applied its

mind as no reasons have been disclosed as to why the order of the

Identification needs to be confirmed by rejecting the Petitioners

submissions which were made by the Petitioners vide their reply

dated 29th January, 2018. The learned counsel for the Petitioners

also submits that the copy of the order of Identification was not

supplied to the Petitioners in spite of a written application to that

effect was made on 15th June, 2018 (Exhibit "C"). He submits that

the stand taken by the Respondents in the reply of the Petition that

it is not necessary to supply the copy of order of Identification is

also unsustainable as in the absence of copy of the said order, the

Petitioners are not able to know the reasons for rejection of

grounds raised by them in their reply dated 29 th January, 2018 as

also as to why they have denied the opportunity of personal

hearing. The learned counsel for the Petitioners has referred to the

order of Review Committee to show that the same is a non

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speaking order and has been passed mechanically without

considering the reply of the Petitioners. In the circumstances, he

submits that both the orders being violative of the principles of

natural justice and are being passed in violation of the Master

Circular dated 1st July, 2015, they deserve to be quashed.

8. On the other hand, Ms. Purnima Pandit, the learned

counsel for the Respondents have supported the decision of the

Identification Committee as also the Review Committee. She

submits that copy of the order of Review Committee has been

served upon the Petitioners and as such there was no necessity to

supply copy of the order of Identification Committee. She argued

that the order of Review Committee is a reasoned order which

needs no interference.

9. We have considered the submissions made by the

learned counsel for the parties and we have also gone through the

averments made in the Petition, the reply and the impugned order.

10. In order to appreciate the contentions raised by the

parties, it would be appropriate to refer few clauses of the Master

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Circular on Willful Defaulter dated 1 st July, 2018 issued by the

Reserve Bank of India.

11. Clause 2.1.3 of the Master Circular in regard to the

guidelines on Wilful Default reads thus:

Wilful Default: A 'wilful default' would be deemed to have occurred if any of the following events is noted:

(a) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations.

(b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.

(c) The unit has defaulted in meeting its payment / repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.

(d) The unit has defaulted in meeting its payment / repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/lender.

The identification of the willful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of

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isolated transactions/ incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.

12. Clause 3 deals with mechanism for identification of

Wilful Defaulter of which relevant portion is extracted, which read

thus:

"The mechanism referred to in paragraph 2.5 above should generally include the following.

(a) The evidence of wilful default on the part of the borrowing company and its promoter/ whole-time director at the relevant time should be examined by a Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the rank of GM/ DGM.

(b) If the Committee concludes that an event of wilful default has occurred, it shall issue a show cause notice to the concerned borrower and the promoter / whole- time director and call for their submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter / whole-time director for a personal hearing if the Committee feels such an opportunity is necessary.

(c) The order of the Committee should be reviewed by another Committee headed by the Chairman/ Chairman & Managing Director or the Managing- Director & Chief Executive Officer/ CEO's and consisting, in addition, to two independent directors/ non-executive directors of the bank and the order shall become final only after it is confirmed by the said Review Committee.

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However, if the identification Committee does not pass an order declaring a borrower as a wilful defaulter, then the Review Committee need not be set up to review such decisions."

13. Clause 2.5 of the Master Circular deals with "Penal

Measures" which should be initiated by the banks against wilful

defaulter identified as per the definition indicated at Clause 2.1.3.

Clasue 2.5 read thus:

"The following measures should be initiated by the

banks and Fls against the wilful defaulters identified

as per the definition indicated at paragraph 2.1.3

above.

(a) No additional facilities should be granted by any

bank/ FI to the listed wilful defaulters. In addition,

such companies (including their entrepreneurs/

promoters) where banks/ Fis have identified

siphoning / diversion of funds, misrepresentation,

falsification of accounts and fraudulent transactions

should be debarred from institutional finance from

the scheduled commercial banks, Financial

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Institutions, NBFCs, for floating new ventures for a

period of 5 years from the date of removal of their

name from the list of wilful defaulters as published/

disseminated by RBI/CICs.

(b) The legal process, wherever warranted, against

the borrowers/ guarantors and foreclosure for

recovery of dues should be initiated expeditiously.

The leaders may initiate criminal proceedings against

wilful defaulters, wherever necessary.

(c) Wherever possible, the banks and Fis should

adopt a proactive approach for a change of

management of the wilfully defaulting borrower unit.

(d) A covenant in the loan agreements, with the

companies to which the banks / Fis have given

funded/ non-funded credit facility, should be

incorporated by the banks/ Fis to the effect that the

borrowing company should not induct on its board a

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person whose name appears in the list of Wilful

Defaulters and that in case, such a person is found to

be on its board, it would take expeditious and

effective steps for removal of the person from its

board.

It would be imperative on the part of the banks and

Fis to put in place a transparent mechanism for the

entire process so that the penal provisions are not

misused and the scope of such discretionary powers

are kept to the barest minimum. It should also be

ensured that a solitary or isolated instance is not

made the basis for imposing the penal action."

14. On the close scrutiny of the aforesaid provisions of

Master Circular, it is clear that the consequences of declaring any

lender as wilful defaulter are serious in nature. It is also clear that

for declaring a lender to be wilful defaulter specific finding is

required to have been recorded in terms of Clasue 2.1.3 (a) to (d) as

the case may be. The Master Circular also provides a mechanism

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to be adopted for identifying the wilful defaulter. It includes,

availability of evidence of wilful default on the part of borrowing

company and its promoter/ whole-time director which needs to be

examined by the Identification Committee. If the Committee

concludes that an event of wilful default has occurred, it is

obligatory on the part of Identification Committee to issue a show

cause notice to the concerned borrower and the promoter/ whole-

time director calling from their submissions and after considering

their submissions as may be received, an order recording the fact

of wilful default has to be passed after giving reasons for the same.

It is also incumbent upon the Identification Committee to give an

opportunity of personal hearing to borrower & promoter / whole-

time director if it feels that such opportunity is necessary. The said

order of the Committee needs to be reviewed by another Committee

(Review Committee) as per Clause 3(c) of the Master Circular.

15. Examining the present matter on the touch stone of the

aforesaid provisions, we find that the Respondent Bank has failed

to comply with the aforesaid mechanism provided under the

Master Circular. It is clear from the record that in response to the

notice issued by the Bank informing the Petitioners about their

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intentions to proceed against them for declaring them as willful

defaulter and giving last chance to deposit outstanding amounts,

the Petitioners have submitted a detailed reply dated 29 th January,

2018 giving reasons as to why such proceeding cannot be initiated.

However, it appears that thereafter the Identification Committee

has passed an order on 9th March, 2018 recording that the

Petitioners have committed wilfull default. It is also an admitted

fact that the copy of the order dated 9 th March, 2018 was not

supplied to the Petitioners even though a written request for the

same was made. Moreover, in the stand of the Bank in reply to the

Petition, it is stated that is not necessary to supply the copy of the

order of the Identification Committee to the Petitioners.

16. In the circumstances, in our considered view the

Respondents while declaring the Petitioners as wilful defaulter

have violated the provisions contained in the Master Circular and

have also acted in violation of the principles of natural justice. The

impugned action which is penal in nature has been taken causing

serious implication on the Petitioners without following the basis

principles of natural justice. The impugned order of Review

Committee as is clear from a bare reading of it, is a non speaking

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order as the operative part of the order of Review Committee which

contains the reasons reads thus:

"The Review Committee has examined and reviewed

the proceedings initiated order and the findings of the

Identification Committee and found that they are in

order and confirmed that you have committed the

following willful default:-

(Reasons) The unit has defaulted reasons in meeting

its payment / repayment obligation to the lender and

has not utilized the finance from lender even when it has

capacity to honour the said obligations."

This according to our considered view the order of the Review

Committee cannot be termed as reasoned order and as such it

cannot be sustained.

17. We are also of the considered view that the Respondent

Bank cannot be allowed to say that it is not necessary for them to

supply copy of the order passed by the Identification Committee.

As would be clear from Clause 3(b) of the Master Circular the

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Identification Committee has to record reasons while passing the

order of recording the fact of commission of wilful default as also to

assign valid reasons as to whether it is necessary to give the

borrower and the the promoter/whole time director the opportunity

of personal hearing. This requirement whether has been complied

with or not could have been examined only if the said order was

brought on record. But strangely in reply the Bank has taken a

stand that the order dated 9th March, 2018 passed by the

Identification Committee is the internal order and it is not

supposed to be served upon the Petitioners. It is also stated by the

Respondents in the reply that no question arises of serving the

order dated 9th March, 2018 on the Petitioners and that the order

dated 9th March, 2018 is the preliminary internal order and after

its finalization by Review Committee, it is conveyed to the

Petitioners. Thus from the stand taken by the Respondents, it is

clear that they have neither supplied copy of the order passed by

the Identification Committee to the Petitioners nor according to

them it was necessary. It is also very strange that the said order

has not even been brought on record by the Bank to deny the

Petitioners' contention that their grounds raised through reply

dated 29th January, 2018 to show cause notice against proposed

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declaration of wilful defaulter have not been considered and that as

to why the Petitioners were denied the opportunity of being heard.

18. In our considered view the stand of the Bank that they

are not obliged to furnish copy of the order passed by the

Identification Committee cannot be sustained. Such stand if

accepted would given rise to arbitrary exercise of powers as the

Identification Committee may give complete go bye to the

requirement of assigning reasons for declaring a party as Wilful

Defaulter and also requirement of giving reasons as to why

opportunity of personal hearing would not be necessary.

19. In the present case, as already observed even the order

of Review Committee is bereft of any reasons for arriving at the

conclusion that, "the Petitioners have defaulted in meeting its

payment/ repayment obligation to the lender even when it has

capacity to honour the said obligation.

20. Having regard to the aforesaid in our considered view

failure to supply the reasons by the Identification Committee of

recording the fact that the Petitioners are in wilful default and as to

why they need not be given an opportunity of hearing when in their

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reply dated 29th January, 2018 the Petitioners have raised various

grounds opposing the proposed action of declaring them willful

defaulter and sought opportunity of personal hearing cannot be

said to be justified. Similarly absence of reasons in the order of

Review Committee also amounts to denial of justice. It is now well

settled that reasons are the live links between the minds of the

decision taker to the controversy in question and the decision or

conclusion arrived at. Reasons substitute subjectivity to objectivity

right to reason is an indispensable part of sound judicial system.

The rational is that the affected party can know why the decision

has gone against him. One of the statutory requirement of the

natural justice is spelling out reasons for the order made, in other

words a speaking order. Even in respect of administrative order the

giving of reasons is one of the fundamentals of good

administration.

21. In the circumstances, we set aside the impugned orders

by which the Petitioners have been declared wilful defaulter.

However, the Respondents are at liberty to take fresh steps against

the Petitioners if they are so advised keeping in view the

observations as above and complying the procedure as provided in

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the Master Circular dated 1st July, 2015 issued by Reserve Bank of

India.

22. With the aforesaid liberty, the Petition is allowed.

                  (N.W. SAMBRE, J.)          (SHANTANU KEMKAR, J.)




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