Narendra Seoomal Sabnani And ... vs State Bank Of India, Stressed ...
2021 Latest Caselaw 16614 Bom

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              IN THE HIGH COURT OF JUDICATURE AT BOMBAY
                        NAGPUR BENCH: NAGPUR


                         WRIT PETITION NO. 2281 OF 2021


 1. Narendra Seoomal Sabnani,
    Aged about 68 years, Occ. Business,
    Resident of Nagpur residing at Flat No. 112,
    1st Floor, A Block, Sunder Jeevan
    Apartments, Clark Town, Nagpur-440014.


 2. Ashwin Narendra Sabnani,
    Aged about 36 years, Occ. Business,
    Resident of Nagpur residing at Flat No. 112,
    1st Floor, A Block, Sunder Jeevan
    Apartments, Clark Town, Nagpur-440014.


 3. Anita Narendra Sabnani,
    Aged about 60 years, Occ. Business,
    Resident of Nagpur residing at Flat No. 112,
    1st Floor, A Block, Sunder Jeevan
    Apartments, Clark Town, Nagpur-440014.                      . . . PETITIONERS


                           ...V E R S U S..

 1. State Bank of India,
    Stressed Asset Resolution Group (SARG),
    Commercial Branch-III through its
    Deputy General Manager at
    Branch Code:- 61341,
    112/115, Floor-1, Plot-212,
    West Wing, Tulsiani Chambers,
    Free Press Journal Marg,
    Nariman Point, Mumbai-400021.




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  2. Wilful Defaulter Identification Committee
       through its Officers
  i) Shri S. Salee, DMD (SARG), Chairman
  ii) Shri Sugandhi Iyer, GM (SARG), Member
  iii) Shri P. C. Sunoj, GM (FIG), Member,
       State Bank of India
       Stressed Asset Resolution Group (SARG),
       Commercial Branch-III
       Branch Code:- 61341,
       112/115, Floor-1, Plot-212,
       West Wing, Tulsiani Chambers,
       Free Press Journal Marg,
       Nariman Point, Mumbai-400021.

  3. Review Committee for Wilful Defaulters
     through its Chairman at
     State Bank of India
     Stressed Asset Resolution Group (SARG),
     Commercial Branch-III
     Branch Code:- 61341,
     112/115, Floor-1, Plot-212,
     West Wing, Tulsiani Chambers,
     Free Press Journal Marg,
     Nariman Point, Mumbai-400021.                                     . . . RESPONDENTS

 ------------------------------------------------------------------------------------------------
 Shri Kapil Hirani, Advocate for petitioners.
 Shri S. N. Kumar, Advocate for respondents.
 -----------------------------------------------------------------------------------------------
                  CORAM:- M. S. SONAK AND
                          PUSHPA V. GANEDIWALA, JJ.

DATED:- 01.12.2021

JUDGMENT (PER: M. S. SONAK, J.):-

1. Heard Shri Kapil Hirani, learned counsel for the

petitioners, and Shri S. N. Kumar learned counsel for the respondents.

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2. Rule. The rule is made returnable forthwith at the request

and with the consent of the learned counsel for the parties.

3. The petitioners question orders dated 07.12.2020 and

26.03.2021 made by Wilful Defaulter Identification Committee (the

WDIC) and the Review Committee respectively, to the extent that such

orders collectively declare the petitioners as "Wilful Defaulter".

4. Shri Kapil Hirani, learned counsel for the petitioners at the

very outset made it very clear that the challenge to the above-

impugned orders was qua the petitioners only and not M/s. Universal

Industrial Equipments and Technical Services Pvt. Ltd. (the Company)

of which the petitioners were the Directors. Therefore,

notwithstanding the width of prayer clause (B) of the petition, this

petition is restricted to challenging the impugned orders insofar as

they declare the petitioners as wilful defaulters and not to the extent

that such orders declare the Company as wilful defaulter.

5. Having regard to the above position, we also make it clear

that we are not examining the legality and validity of the impugned

orders qua the Company because, the Company has not challenged the

impugned orders before us and further, we are informed that there are

subsequent developments concerning the status of the Company, due

to which the Company may not even to be in a position to challenge

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the same before us. If therefore, on account of the impugned orders

attaining finality qua the Company, there is an impact on the status of

the petitioner, then, such impact will continue to operate against the

present petitioners, even if we quash the impugned orders qua the

present petitioners.

6. Shri Kapil Hirani, learned counsel for the petitioners has

challenged the impugned orders broadly on the following grounds,

which are urged in the alternate and without prejudice to one

another:-

(i) The impugned orders are contrary to the Reserve Bank of

India's Master Circular of Wilful Defaulters dated 01.07.2015.

(ii) The show-cause notice dated 22.10.2020 was not issued

by the WDIC but, by the Deputy General Manager (DGM), who had no

jurisdiction to issue the same. Therefore, the very initiation of

proceedings is ultra vires.

(iii) The impugned orders relied upon the valuation report of

Shri K. R. Phadke. Despite the request, a copy of this valuation report

was never made available to the petitioners. This means that some

material adverse to the interest of the petitioner has been relied upon

without granting the petitioner reasonable opportunity of explaining

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the same or countering the same. There is thus a violation of the

principle of natural justice, which vitiates the impugned orders.

(iv) The impugned orders contain no reasons, are non-

speaking, and are made in a mechanical manner and without

application of mind.

(v) There are no findings in the impugned orders about

default on the part of the petitioners being intentional or deliberate or

calculated. In the absence of any such findings, the impugned orders

are quite unsustainable.

7. Shri Kapil Hirani, learned counsel for the petitioners relied

upon the decisions of this Court in the case of M/s. Kanchan Motors

Vs. Bank of India [Writ Petition (L) No. 2072/2018, decided on

12.07.2018] and Gunwant Deopare Vs. Branch Manager, Bank of

Maharashtra [Writ Petition No. 1958/2020, decided on 24.08.2021] in

support of his contention that the order declaring any person or entity

as wilful defaulter must be a speaking order containing reasons.

8. Shri S. N. Kumar, learned counsel for the respondents

submits that the impugned orders were made on admissions of the

petitioners and therefore, there was no necessity of any elaborate

reasons. He submits that there were admission as well as un-

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impeachable record that the petitioners had opened separate bank

accounts and deposited the amount therein. He submits that from this,

it was quite evident that criteria prescribed under para no. 2.1.3 of the

Master Circular was fulfilled. He submits that the Committee

exercised administrative powers and therefore, there can be no

requirement of giving any elaborate reasons in support of its orders.

He submits that the contention of the show-cause notice being issued

by DGM and not by the WDIC was never raised by the petitioners

before the WDIC or the Review Committee and therefore, such issue

cannot be raised for the first time in this Writ Petition. He submits that

even otherwise this contention has no substance because the purpose

of the show-cause notice was only to afford a reasonable opportunity

to the petitioners. He submits that all the relevant materials were

furnished to the petitioners and there was no violation of the principle

of natural justice. For all these reasons, he submits that this petition

may be dismissed.

9. The rival contentions now fall for our determination.

10. In this case, the record bears out that the credit facility

was extended by respondent no. 1 to the Company sometime in

November-2011. Further, in September-2015 or thereabout, the

Company was classified as a Non-Preforming Asset (NPA). On

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22.10.2020, the DGM representing the WDIC issued the show-cause

notice to the Company as well as to the petitioners requiring them to

show-cause as to why they should not be declared as "Wilful

Defaulters". The petitioners filed their response to the show-cause

notice but did not object to the issue of show-cause notice by the DGM.

A personal hearing was granted in the matter and by the impugned

order dated 07.12.2020, the Company and the petitioners were

declared as "Wilful Defaulters" but, were given 15 days window period

to file representation against this order to the Review Committee.

11. The petitioners on 15.12.2020 submitted their

representation to the Review Committee. The Review Committee vide

order dated 23.03.2021 has rejected this representation and confirmed

the impugned order dated 07.12.2020.

12. Now, there is no dispute that the issue of declaring any

person or entity as a wilful defaulter is governed by the RBI's Master

Circular dated 01.07.2015. This Master Circular consolidates the

instructions on this issue up to 30.06.2015. Para no. 2 of the Master

Circular contents guidelines for determining wilful defaulters. In

particular, para no. 2.1.3 indicates the events in which a wilful default

would deemed to have occurred. This includes inter alia the events

where the unit had defaulted in meeting its payment/repayment to the

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lender even it has the capacity to honor such obligations; non-

utilization of finances for specific purposes for which it was availed of

but, was defaulted for other purposes; siphoning of the funds that not

being released for the specific purpose for which they were obtained;

disposal or removal of movable fixed assets or immovable property

given to secure a term loan without knowledge of bank/lender. This

clause provides identification of wilful default should be made keeping

in view the track record of the borrowers and should not be based on

isolated transactions/incidents. Most importantly, this Clause provides

that default be categorized as wilful must be intentional, deliberate,

and calculated.

13. Para no. 2.5 of the Master Circular provides for penal

measures that should be initiated by the banks and financial

institutions against the wilful defaulters identified in terms of para no.

2.1.3 of the Master Circular. From the perusal of sub-para no. (a) to

(d) and para no. 2.5, it is evident that penal measures are quite

substantial and severe. Therefore, this paragraph itself provides that it

would be imperative on the part of the bank and financial institutions

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

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be ensured that a solitary or isolated instance is not made the basis for

imposing the penal action.

14. Para no. 3 of the Master Circular provides for a

mechanism of identification of the wilful defaulters. In the first place,

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. Secondly, if the Committee concludes that 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. Thirdly, 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/CEOs 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. However, if the Identification Committee does not pass an

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order declaring a borrower as a wilful defaulter, then the Review

Committee need not be set up to review such decisions. Fourthly, as

regards a non-promoter/non-whole-time director, the provisions of

Section 2(60) of the Companies Act, 2013 must be kept in mind.

15. Para no. 4 provides for criminal action against wilful

defaulters and para no. 5 provides for reporting with which we are not

concerned for the present.

16. The Master Circular, therefore, not only provides for the

event in which wilful default would be deemed to have been occurred

but, also requires that the default to be categorized as wilful must be

intentional, deliberate, and calculated. The mechanism for

identification of wilful default incorporates inter alia principle of

natural justice and fair play including, in particular, the requirement of

recording all reasons. Shri Hirani's contention will therefore have to

be examined having regard to such provisions of the Master Circular.

17. Para no. 3(b) of the Master Circular refers to the issuance

of show-cause notice by the WDIC. In this case, the show-cause notice

has been issued by the DGM. However, on perusal of such show-cause

notice, we find that the DGM has merely acted on the order and

directions of the WDIC. Para no. 4 of the show-cause notice dated

22.10.2020 makes it clear that the same is issued as per the order and

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directions of the WDIC. From the perusal of the show-cause notice, we

are quite satisfied that the show-cause notice is in fact has been issued

by the WDIC itself though, the same may have been communicated by

the DGM in terms of the order and directions of the WDIC. Therefore,

the show-cause notice itself cannot be said to be vitiated on the ground

urged by Shri Hirani, on behalf of the petitioners. Besides, we find that

even the Petitioners quite correctly proceeded on this position and did

not even raise any dispute on this score before the WDIC or the Review

Committee.

18. In response to the show-cause notice, the petitioners filed

detailed submissions. The WDIC was expected to consider such

submissions and thereafter issue an order recording a conclusion of

wilful default and the reasons for the same. This is clear from what is

set out in para no. 3(d) of the Master Circular. However, from the

perusal of the impugned order dated 07.12.2020 made by the WDIC,

we find that the WDIC has, in tabular form, referred, in brief, to the

allegations in the show-cause notice, the selective response to the

allegations and thereafter, recorded conclusion that the petitioners and

the Company are wilful defaulters. In support of such conclusion, the

impugned order, in a quite cursory manner, has used the following

expressions:-

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"the reply given by the company is not acceptable".

"the reply given by the company does not commensurate the default

criteria."

19. The impugned order dated 07.12.2020 also states that

borrowers have accepted having opened accounts in other banks in

their reply or they have invested funds in associate concerns. Shri

Hirani points out that there are no such admissions and in any case,

the detailed submissions in the context of the alleged opening of bank

accounts or investments have not even been referred to, much less

considered and evaluated in the impugned orders. There is merit in

this contention because the impugned order does not reflect any such

consideration.

20. In terms of the mechanism provided in the Master

Circular, the petitioners' representation against the order dated

07.12.2020 was referred to the Review Committee, which disposed of

said representation by the impugned order dated 23.03.2021. Again,

the perusal of the impugned order dated 26.03.2021 indicates that

even Review Committee has simply paraphrased the expressions used

by the WDIC in its order dated 07.12.2020 to uphold the impugned

order dated 07.12.2020. Even the Review Committee has referred to

the so-called admissions on the part of the petitioners and the

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Company. The Review Committee, in addition, has referred to and

relied upon the valuation of Shri K. R. Phadke to conclude that the

facts mentioned therein are correct and based upon the same, the

criteria for declaring the petitioners and the Company as wilful

defaulter stands fulfilled. Importantly, even the order of the Review

Committee simply proceeds to state that submissions made on behalf

of the Company are not acceptable without giving any explanation as

to why or based on what reason such submissions are not acceptable.

21. Therefore, in the peculiar facts of the present case, we are

quite satisfied that the impugned orders dated 07.12.2020 and

26.03.2021 are non-speaking orders containing no reasons to back the

conclusion recorded in the same. The requirement of recording of

reasons cannot be downplayed by merely contending that powers

exercised by the WDIC or the Review Committee are only

administrative and not quasi-judicial or judicial. The Master Circular,

which governs the issue of declaring person or entity as wilful

defaulter itself provides in para no. 3(b) that the WDIC has to consider

the submissions made in response to the show-cause notice and only

thereafter issue an order recording the fact of wilful default and the

reasons for the same. Besides, having regards to consequence that

issue upon declaration of a person or entity as a wilful defaulter, the

principles of natural justice will have to be read into the decision-

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making process. The requirement of giving reasons is now accepted as

one of the facets of the principles of natural justice.

22. In the case of National Highways Authority of India Vs.

Madhukar Kumar [MANU/SC/0698/2021], the Hon'ble Supreme

Court has held that it is settled law that the reasons are harbinger

between the mind of the maker of the order to the controversy in

question and the decision or conclusion arrived at. It also excludes the

chances to reach arbitrary, whimsical or capricious decision or

conclusion. The reasons assure an inbuilt support to the

conclusion/decision reached. The order when it affects the right of a

citizen or a person, irrespective of the fact, whether it is quasi-judicial

or administrative fair play requires recording of germane and relevant

precise reasons. The recording of reasons is also an assurance that the

authority concerned consciously applied its mind to the facts on

record. It also aids the appellate or revisional authority or the

supervisory jurisdiction of the High Court under Article 226 or the

appellate jurisdiction of this Court under Article 136 to see whether

the authority concerned acted fairly and justly to mete out justice to

the aggrieved person. Similarly, in the case of S. N. Mukherjee Vs.

Union of India [(1990) 4 SCC 594], the Hon'ble Supreme Court has

held that even an administrative authority, exercising judicial or a

quasi-judicial power, must record reasons for its decision. This is

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subject to the exception where the requirement has been expressly or

by necessary implication done away.

23. The impugned orders in the present case have recorded

conclusions without indicating the reasons in support of the same. Use

of mere expression like the one referred to in paragraph 18 above does

not amount to giving of reasons. The reasons must reflect some

application of mind to the submissions made in the response to the

show-cause notice failing which an impression is legitimately created

that there is no consideration of such submissions. As noted, even para

no. 3(b) of the Master Circular provides for consideration of such

submissions before making the order declaring a person or an entity as

a wilful defaulter and the record of reasons in support of the

conclusion.

24. In the precise context of the Master Circular dated

01.07.2015, the Division Bench of this Court in M/s. Kanchan Motors

(supra) was pleased to set aside the orders made by the WDIC and the

Review Committee because such orders were found to be non-

reasoned or non-speaking orders. The Division Bench did not approve

the practice of simply recording conclusions without any reasons to

back the same. The Division Bench observed that the absence of

reasons in the order of the Review Committee amounts to a denial of

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justice since it is now well-settled that reasons are live links between

the minds of decision taker to the controversy in question and the

decision or conclusion arrived at. Reasons substitute subjectivity for

objectivity so that the affected party can know why the decision has

gone against him. One of the statutory requirements of natural justice

is spelling out the reasons for the order made, in other words, a

speaking order. Even in respect of administrative orders, the giving of

reasons is one of the fundamentals of good administration. Based on

all these observations, the Division Bench set aside the orders

impugned before it on the ground that such orders were non-speaking

and non-reasoned.

25. Similarly, in Gunwant Deopare (supra) another Division

Bench of this Court held that before any declaration as wilful defaulter

is made, the fairness and reasonableness demand that the concerned

borrower is served with an order recording the facts of wilful default

and the reasons for the same. Further, it is also necessary that the

WDIC and the Review Committee are satisfied that the default is

intentional, deliberate, and calculated and such satisfaction must be

reflected in the orders to be made by the WDIC and the Review

Committee. Since the orders impugned before the Division Bench

were bereft of the reasons and there was no satisfaction about default

being intentional, deliberate, and calculated, the same were set aside.

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26. Since we propose to set aside the impugned orders on the

ground that they contain no reason or are non-speaking orders, we do

not wish to go into the issue concerning the non-supply of valuation

report relied upon by the WDIC and the Review Committee. But we do

feel that to avoid any challenges based on a failure of natural justice or

even as a measure of fairness, it would be better if this valuation report

is made available to the petitioners so that the petitioners can make

their submissions on the same. For the present, however, we make it

clear that we are setting aside the impugned orders mainly on the

ground that they contain no reasons in support of their conclusion and

in that sense are non-speaking orders.

27. We dispose of this petition by making the following order:-

(i) Subject to the caveat in paragraph nos. 4 & 5 of this

judgment and order, we set aside the impugned orders qua the

petitioners only and not the Company.

(ii) The respondents are granted liberty to proceed from the

stage of issuance of show-cause notice dated 22.10.2020 and make

such orders as may be appropriate in terms of the Master Circular

dated 01.07.2015.

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              (iii)            Rule is made absolute to the aforesaid extent only. There

              shall be no order as to costs.




                      (PUSHPA V. GANEDIWALA, J.)                (M. S. SONAK, J.)




RR Jaiswal