Calcutta High Court (Appellete Side)

Akhilesh Kotia vs Reserve Bank Of India & Ors on 24 March, 2022

24.03.2022.
Court No.13
Item Nos. 35 & 36
   ap                       W.P.A. No. 4080 of 2022
                          (Through Video Conference)

                                Akhilesh Kotia
                                    Versus
                          Reserve Bank of India & Ors.
                                      And
                            W.P.A. No. 4172 of 2022
                          (Through Video Conference)

                                Akhilesh Kotia
                                    Versus
                          Reserve Bank of India & Ors.

                    Mr. Jishnu Chowdhury,
                    Mr. Aritra Basu,
                    Ms. Namrata Basu.
                                                 ...For the petitioner.
                    Mr. Om Narayan Rai,
                    Mr. Saikat Ray Chowdhury.
                                        ...For the Allahabad Bank.

                    Affidavit-of-service filed in Court today be taken

           on record.

                    The writ petitioner challenges a show-cause

           notice issued by the Allahabad Bank's Identification

           Committee of Willful Defaulters dated 2nd June 2018,

           and a subsequent Order of the Review Committee of

           Willful Defaulters dated 21st February 2022, holding

           that the petitioner is a willful defaulter.

                    The principal grounds on which willful default

           has been alleged, and found against the petitioner by

           the Identification Committee is as follows : -

                     (a) The account was under sole banking
                     arrangement. Entire sale proceeds were
                     supposed to be routed through the account
                     maintained with us. To the contrary, as per
                     information on record, the company maintained
                             2




       account with Axis bank, and routed transaction
       through that bank as well.
       (b) Moreover, proceeds of the same of the Non-
       LC bills which were purchased by our branch,
       were       routed       through       A/C.     No.
       914020039582573 of Axis Bank Limited,
       Kolkata Main Branch, violating the self-
       liquidating nature of IBD account. Thus, it is a
       case of diversion of fund.
       (c) As        per      sanction      letter    No.
       BR/MARSON/2014-15/21 dated 31.12.2014, it
       was stipulated vide point no 9 of general terms
       and condition "No further investment will be
       made by way of loans and advances or
       investment in share without our prior
       permission".     But contrary to the same the
       company without taking permission from the
       bank, has made a fresh investment of Rs.27.63
       Cr. During FY 2015-16 in fully paid up equity
       share in M/s. Marson Power Ltd., a
       group/associate concerns, against pre-tax profit
       of Rs.3.44 Cr. As on 31.03.2016 (cash profit of
       Rs.6.55 Cr.). It is diversion of short term fund to
       long term purpose, adversely affecting the
       working capital of the company, which
       subsequently resulted poor cash flow and
       account was finally categorized as NPA on
       22.10.2017 w.e.f. 31.12.2014.
       (d) Above acts of the company tantamount to
       diversion of funds.

      The writ petitioner, by a communication dated

25th June 2018, in reply to the show-cause notice, has

admitted at paragraph 3 as follows:

     "3.    Please note that due to your ineffective and
     unprofessional services which caused great
     hindrance in running day to day transactions, my
     clients were constrained to open an account with
     Axis Bank Limited, Kolkata Main Branch, being
     Account No. 914020039582573 primarily for the
     online payment of statutory dues like payment of
     TDS, GST etc. Due to non-cooperation of Bank at
     various stages some of Banking transactions both
     incoming and outgoing were routed through Axis
     bank and which was under your knowledge. With
     regards to the allegation of diversion of fund
     received against some Non-LC backed bills, my
     clients are in a position to confirm that no money
     was diverted for any personal use or otherwise
     from the sale proceeds and it was solely done for
     the benefit of the Company and the said action
                            3




      was taken by my clients for saving the Company
      from closure."

      The Review Committee in its resolution taken in

a meeting held on 2nd February, 2022, has resolved

and confirmed the decision of the Identification

Committee as follows:

      "RESOLVED that the Review Committee for
      Willful Defaulters Note dated 28.12.2021 on the
      orders passed by Willful Defaulter Screening
      Committee      for   declaring   the    following
      accounts/persons as willful defaulters as per RBI
      Master Circular No. RBI/2015-16/100 DBR No.
      CID.BC.22/20.16.003/2015-16 dt. 01.07.2015
      1.

.............

2. Ex-Directors Mr. Akhilesh Kotia of M/s. MARSONS Ltd. as Willful Defaulters.

3. .................

4. ..................

5. ..................

6. ..................

7. ..................

8. ...................

for the reasons mentioned in the note, be and is hereby ...................."

It is submitted by the Counsel for the petitioner

that non-application of mind is writ large in the order

of the Review committee.

Admittedly, the actual interpretation of the

Guidelines of the Reserve Bank of India for willful

defaulters has been dealt with by the Hon'ble Supreme

Court in the case of Kotak Mahindra Bank Vs.

Hindustan National Glass & Industries Ltd. reported

in (2013) 7 SCC 369. Therein, the Apex Court has

termed the Review Committee's decision as a

confirming and/or second committee decision. It is in

fact, neither a review nor an appeal.

In essence, the order declaring a person as

willful defaulter takes effect only after the Review

Committee finds as such. The order of the first

Identification Committee is at best a preliminary

finding. If this be the importance of the role of the

Review Committee, this Court is extremely baffled and

shocked at the lackadaisical manner in which the

Review Committee has declared the petitioner to be a

willful defaulter. It is concerning to note that in a

single page, as many as 8 persons have been

mechanically declared as willful defaulters.

There is only a casual and lethargic reference to

the order of the Identification Committee. The Review

Committee has not bothered to discuss, even briefly,

the findings of the first Identification Committee. The

Review Committee does not appear to have

deliberated, as to why it needs to confirm and accept

the proposals of the first Identification Committee.

There is thus, some merit in the petitioner's

argument that there appears to be a total non-

application of mind on the part of the Review

Committee, in passing the impugned order.

Mr. Om Narayan Rai, counsel for the Bank has

laboured for long to defend the indefensible. He has

first placed reliance on the findings of the

Identification/ Screening Committee and the prima

facie admission of the writ petitioner to the show-

cause issued by the Identification Committee. The writ

petitioner is stated to have admitted that the he has

routed and diverted transactions of the principal

borrower through the Axis Bank Ltd. It is also argued

that the writ petitioner was at all material times aware

of its obligation not to transact through any Bank or

financial institution. Reference in this regard is made

to the sanction letter duly accepted by resolution of

the principal debtor. It is indeed an admitted position

that the petitioner and his family members had full

and complete control of the principal debtor M/s.

Marsons Limited.

It is argued, that the petitioner cannot therefore,

feign ignorance of its responsibility and obligations

towards the Bank. It is also argued that the prior

knowledge of the bank of such routing of transactions

through Axis bank Limited would not be sufficient to

absolve the petitioner of the rigours of the Guidelines

of the Reserve Bank of India.

It does appear that the Allahabad Bank may

have knowledge of such routing of transactions of the

principal debtor through the Axis Bank Ltd. However,

as to whether there has been a waiver or acquiescence

by the Bank has not been discussed or addressed. Mr.

Rai submits that this argument was not raised by the

petitioner.

Be that as it may, the object and purpose of the

aforesaid discussions is to determine whether there

was application of mind by both the Identification

Committee as well as the Review Committee while

passing the draconian order that declared the

petitioner as a willful defaulter. No such application of

mind is apparent or evident from the orders of the

review committee.

Useful reference may be made to the decision of

the Hon'ble Supreme Court of India in the case of

National Highway Authority of India & Ors. - Vs. -

Madhukar Kumar & Ors. reported in 2021 SCC

OnLine SC 791, cited by Mr. Rai for the Bank.

Mr. Rai has taken great pains to place in detail

the second part of paragraph 66 of the said decision to

support his argument that the culpability and guilt of

the petitioner under the Willful Defaulter Guidelines of

the Reserve Bank of India can be easily culled out from

other parts of the pleadings and documents on record.

According to him, in such situations, a Court should

not interfere with the order of the Authorities even if it

is devoid of reasons. It is equally important, as fairly

placed by Mr. Rai, to notice the second half of

paragraph 65 of the said judgment.

Paragraphs 65 and 66 of the said judgment are

set out hereinbelow:

"65. Persons, who may have a right or an interest, would know, what are the reasons which impelled

the Administrator to take a particular decision. Judicial review, in India, which encompasses the wide contours of public interest litigation as well, would receive immeasurable assistance, if the reasons for particular decisions, are articulated to the extent possible. The giving of reasons also has a disciplining effect on the Administrator. This is for the reason that the reasons would capture the thought process, which culminated in the decision and it would help the Administrator steer clear of the vices of illegality, irrationality and also disproportionality. Reasons could help establish application of mind. Conversely, the absence of reasons may unerringly point to non-application of mind. The duty to act fairly, may require reasons to be recorded but the said duty, though there is a general duty on all state players to act fairly, may have its underpinnings, ultimately in legal rights.

66. It is one thing to say that there should be reasons, which persuaded the Administrator to take a particular decision and a different thing to find that the reasons must be incorporated in a decision. The question, relating to duty to communicate such a decision, would arise to be considered in different situations, having regard to the impact, which it, in law, produces. In fact, the second proviso to Rule 17 of the Rules, provides not only for there being reasons, but the reasons for refusal to permit barricades, must be communicated. If the law provides for a duty to record reasons in writing, undoubtedly, it must be followed and it would amount to the violation of the Statute, if it were not followed. Even if, there is no duty to record reasons or support an order with reasons, there cannot be any doubt that, for every decision, there would be and there must be, a reason. The Constitution does not contemplate any Public Authority, exercising power with caprice or without any rationale. But here again, in the absence of the duty to record reasons, the court is not to be clothed with power to strike down administrative action for the mere reason that no reasons are to be found recorded. In certain situations, the reason for a particular decision, may be gleaned from the pleadings of the Authority, when the matter is tested in a court. From the materials, including the file noting's, which are made available, the court may conclude that there were reasons and the action was not illegal or arbitrary. From admitted facts, the court may conclude that there was sufficient justification, and the mere absence of reasons, would not be sufficient to invalidate the action of the Public Authority. Thus, reasons may, in certain situations, have to be recorded in the order. In other contexts, it would suffice that the reasons are to be found in the files. The court may, when there is no duty to record reasons, support an

administrative decision, with reference to the pleadings aided by materials." (emphasis applied)

Mr. Rai has also referred to the decision of the

Hon'ble Supreme Court of India in the case of

Chairman, State Bank of India & Another - Vs. -

M. J. James reported in (2022) 2 Supreme Court

Cases 301. Indeed the law as it stands has been

extracted in paragraph 31 thereof.

"31. In State of U.P. v. Sudhir Kumar Singh [State of U.P. v. Sudhir Kumar Singh, (2021) 19 SCC 706 : 2020 SCC OnLine SC 847] referring to the aforesaid cases and several other decisions of this Court, the law was crystallised as under : (SCC para 42) "42. An analysis of the aforesaid judgments thus reveals:

42.1. Natural justice is a flexible tool in the hands of the judiciary to reach out in fit cases to remedy injustice. The breach of the audi alteram partem rule cannot by itself, without more, lead to the conclusion that prejudice is thereby caused.

42.2. Where procedural and/or substantive provisions of law embody the principles of natural justice, their infraction per se does not lead to invalidity of the orders passed. Here again, prejudice must be caused to the litigant, except in the case of a mandatory provision of law which is conceived not only in individual interest, but also in public interest. 42.3. No prejudice is caused to the person complaining of the breach of natural justice where such person does not dispute the case against him or it. This can happen by reason of estoppel, acquiescence, waiver and by way of non-challenge or non-denial or admission of facts, in cases in which the Court finds on facts that no real prejudice can therefore be said to have been caused to the person complaining of the breach of natural justice. 42.4. In cases where facts can be stated to be admitted or indisputable, and only one conclusion is possible, the Court does not pass futile orders of setting aside or remand when there is, in fact, no prejudice caused. This conclusion must be drawn by the Court on an appraisal of the facts of a case, and not by the authority who denies natural justice to a person.

42.5. The "prejudice" exception must be more than a mere apprehension or even a reasonable suspicion of a litigant. It should exist as a matter of fact, or be based upon a definite inference of likelihood of

prejudice flowing from the non-observance of natural justice."

The observations of the Hon'ble Supreme Court

of India in this regard, are in the context of prejudice

theory propounded by the Apex Court itself in the case

of State Bank of Patiala - Vs. - S. K. Sharma

reported in (1996) 3 SCC 1669. The said two

decisions have been rendered in the context of Service

law.

The mandate on an Administrative Authority to

disclose reasons have been very succinctly discussed

by the Hon'ble Supreme Court of India in the aforesaid

paragraph 65 of the National Highways decision

(Supra). The purpose behind setting out the reasons

cannot be over emphasized if one applies this dicta to

the instant case. Simply put, the order has far too

serious civil consequences to permit the

Administrative authority to pass orders casually or not

to give reasons. This is the fundamental principle.

What is carved out in paragraph 66 thereof and

paragraph 31 of the SBI Vs MJ James decision

(Supra) is an exception. In the facts and

circumstances of the case, and given the drastic

consequences of being declared a willful defaulter the

exceptions may not be applied and are not attracted in

the instant case.

The consequences of a person being declared a

'willful defaulter' has been discussed and dealt with by

the Hon'ble Supreme Court of India in the decision of

State Bank of India - Vs. - Jha Developers reported

in (2019) 6 SCC 787. Paragraph 24 of the said

judgment is set out hereinbelow:

"24. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 1-7-2015, as it is clear that the events of willful default as mentioned in Para 2.1.3 would only relate to the individual facts of each case. What has typically to be discovered is whether a unit has defaulted in making its payment obligations even when it has the capacity to honour the said obligations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilised for the specific purpose for which the finance was made available. Whether a default is intentional, deliberate, and calculated is again a question of fact which the lender may put to the borrower in a show-cause notice to elicit the borrower's submissions on the same. However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a willful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the willful defaulter, and a promoter/director of a willful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29-A of the Insolvency and Bankruptcy Code, 2016, a willful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that Para 3 of the Master Circular dated 1-7-2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following Para 3(b) of the Revised Circular dated 1-7- 2015, must give its order to the borrower as soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such

representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 1-7-2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised Circular dated 1-7-2015. The impugned judgment [SBI v. Jah Developers (P) Ltd., LPA No. 113 of 2015 sub nom Punjab National Bank v. Kingfisher Airlines Ltd., 2015 SCC OnLine Del 14128 : (2016) 154 DRJ 164] , [Kingfisher Airlines Ltd. v. Union of India, 2015 SCC OnLine Bom 6075 : (2016) 2 Mah LJ 838] is, therefore, set aside, and the appeals are allowed in terms of our judgment. We thank the learned Amicus Curiae, Shri Parag Tripathi, for his valuable assistance to this Court."

In the backdrop of the drastic consequences

being visited upon the writ petitioner, the laid back

and casual attitude of the Review Committee to pass

the order in a ipse dixit manner, without setting out

any reasons whatsoever, makes the case a rather

glaring instance of non-application of mind, and calls

for interference by the Writ Court. The conduct of the

Review Committee, as discussed hereinabove in

passing the aforesaid order, appears to be reflective of

the casual manner in which the loan account has been

monitored by the Bank.

Particular reference to paragraph 42.5 of the SBI