Calcutta High Court
Vishambhar Saran And Anr vs Central Bank Of India And Ors on 14 May, 2024
Author: Sabyasachi Bhattacharyya
Bench: Sabyasachi Bhattacharyya
In the High Court at Calcutta
Constitutional Writ Jurisdiction
Original Side
The Hon'ble Justice Sabyasachi Bhattacharyya
WPO No. 633 of 2023
Vishambhar Saran and Anr.
Vs.
Central Bank of India and Ors.
With
WPO No. 212 of 2024
Vishambhar Saran and Anr.
Vs.
Central Bank of India and Ors.
For the petitioners : Mr. Sabyasachi Choudhury, Adv.
Mr. Rajarshi Dutta, Adv.
Mr. Debjyoti Saha, Adv.
For the respondents : Ms. Usha Doshi, Adv.
Ms. Priyanka Gope, Adv.
Hearing concluded on : 06.05.2024
Judgment on : 14.05.2024
Sabyasachi Bhattacharyya, J:-
1. The two writ petitions, being on connected issues, are taken up
together for hearing.
2. In WPO No. 633 of 2023, the petitioners have challenged the decision
of the Willful Defaulter Identification Committee (hereinafter referred
to as "the First Committee")to declare the petitioners as Willful
Defaulters under the Master Circular on Wilful Defaulters issued by
the Reserve Bank of India (RBI) on July 1, 2015.
3. In WPO No. 212 of 2024, the petitioners have challenged the decision
of the Review Committee (RC) to affirm the said declaration of the First
Committee. At the juncture when the second writ petition was filed, a
cryptic communication of the decision of the RC was made to the
petitioners, based on which the writ petition was filed. Subsequently,
having been served with a copy of the detailedminutes of the RC, the
same has been annexed to a supplementary affidavit filed in
connection with the second writ petitionand also brought within the
fold of the challenge.
4. Thus, the subject-matter of consideration in the present writ petitions
is whether the respondent-Bank, that is, the Central Bank of India
was justified in declaring the petitioners to be willful defaulters
through its First Committee and in affirming the same in the decision
of the RC.
5. Upon hearing learned counsel for the parties, each of the components
of challenge is being dealt with separately hereinbelow.
6. The first ground taken by the petitioners is that the sole basis of the
First Committee decision was a Transaction Audit Report (TAR)
authored by M/s. Deloitte Touche Tohmatsu India, LLP, an Auditor
which purportedly carried out a forensic audit of the borrower-
Company. A bare perusal of the First Committee decision
substantiates the fact that the entire decision is based on allegations
levelled in the said TAR. No independent evidence apart from the TAR
has been relied on by the First Committee in coming to its
conclusions.
7. It is rather surprising that the First Committee relied on the said
report. The Auditor Firm which authored the report itself indicated in
several places of the report that the same was not conclusive.
Instances are:
In the second paragraph of the report, the Auditor stated that the
report has been prepared solely for the internal use and benefit of the
Resolution Professional (RP) for the specific purpose described in the
Contract. In paragraph 4 of the report, the Auditor clarifies that it did
not independently verify the accuracy/reliability/genuineness of the
information and makes no warranties or representations with respect
to any part of the report. Any user who gets any access to or use of
the Report, the Auditor went on to specify, understands and accepts
that it has no rights with respect to the Report except the limited right
to view and use the Report for information purposes alone and at his
sole and entire risk. It was reiterated in paragraph 6 that the Auditor
has not made and does not make any warranties or representations to
any user and does not owe any duty of care or responsibility towards
any user in respect of the Report.
8. Again, in paragraph 8, it is stipulated that the scope of the services of
the Auditor did not constitute an audit conducted in accordance with
generally accepted accounting principles, or an examination of
internal controls/procedures or other attestation or review or services
to perform or agreed upon procedures in accordance with the
standards established by the Institute of Chartered Accountants of
India.
9. In paragraph 10 of the report, the Auditor (rather proudly) declares
that it has assumed that the verbal explanations provided by the
representatives of the Corporate Debtor were accurate and honest
representations but did not independently verify the
accuracy/reliability/genuineness of the information or from other
independent sources unless specified otherwise specifically in the
Report. Hence, the content of the Report should not form the sole basis
for any decision as to a potential course of action without independent
confirmation of its findings, [emphasis supplied] nor should it be relied
on as preferred advice on assets/liabilities-in-question or the
concerned entities and individuals to which it relates.
10. In paragraph 11, the Auditor or any of its partners, Directors or
employees undertake no responsibility in anyway whatsoever to any
user in respect of errors or omissions in the Report including those
which may arise from incorrect or incomplete information provided by
the Corporate Debtor/Resolution Professional including the
representatives.
11. Findings and observations, as noted in paragraph 13 of the Report,
may change based on additional information and clarifications
provided subsequently to the Auditor. It is reiterated in Paragraph 14
that no warranties or representations with respect to the Report to
any user are made and the Report is neither a recommendation nor
aprofessional advice.
12. Importantly, in paragraph 15 it is stated that the findings of the
Report are not binding on any person, entity, authority or court and
hence, no assurance is giventhat a position contrary to that expressed
therein will not be asserted by any person, entity, authority, etc. The
results of the work, it was stated, with respect to review of information
provided should be considered only as a guide and not as a definitive
pronunciation on an individual, entity, etc.
13. Paragraph 17 boldly asserts that the observations reported in those
documents may not be indicative of misconduct or diversion of funds
unless additional procedures are performed to validate the same and
the report may not be suitable for any legal proceedings against any
individual or entity [Emphasis supplied].
14. Hence, the prelude to the report itself thoroughly vitiates the
conclusiveness, veracity and credibility of the same.
15. The second most important feature of the case is that the report was
prepared by the concerned Auditor at the behest of the Liquidator
(Resolution Professional) in a Corporate Insolvency Resolution Process
(CIRP), in connection with an application under Sections 45 and 66 of
the Insolvency and Bankruptcy Code (IBC), 2016 against the
suspended Board of Directors of the Corporate Debtor, the borrower-
Company. The application of the Liquidator came up for
consideration before the National Company Law Tribunal (NCLT) and
was rejected by the same. The premise of such rejection was that
since the Liquidator had no other material except the findings of the
Auditor which do not allege anything against the respondents, the
prayer for directing the respondents to make contribution could not be
allowed. The TAR was thus thoroughly disbelieved and refused to be
relied on by the NCLT.
16. An appeal was preferred against the Appellate Tribunal which was
decided by the National Company Law Appellate Tribunal (NCLAT) on
September 30, 2019. The appeal was also dismissed, thereby affirming
the findings and conclusions of the NCLT disbelieving the TAR.
17. As rightly argued by the petitioners, the Liquidator in the CIRP
represented the Committee of Creditors, comprising the component-
Banks of the Consortium which granted the loan to the borrower-
Company in the first place.
18. The present respondent-Bank, the Central bank of India, was one of
the constituents of the Consortium and thus, being represented by the
Liquidator, is also bound by the NCLT order refusing to accept the
said report. Thus, the respondent-Bank's efforts to declare the writ
petitioners as willful defaulters on the sole basis of the TAR are not
tenable in the eye of law.
19. To add to the woes of the respondents further, the lead Bank of the
Consortium, the Punjab National Bank (PNB), although initially took a
view that the petitioners were willful defaulters, subsequently did a
volte faceand, by relying on the dismissal of the TAR by the NCLT, as
affirmed by the NCLAT, the PNB held that the petitioners are not
willful defaulters, leaving it open for the Bank to proceed in future on
the basis of independent material, if the same comes forth. However,
till date, nothing has come forward by way of independent material to
substantiate the stand of the respondents.
20. Thus, the reliance on the TAR in the decisions of the First Committee
and the RC are entirely de hors the law and perverse.
21. Moreover, in the TAR itself, as reflected in the quoted portions thereof
in the Show-cause Notice and the decision of the First Committee, no
allegation has been made against the petitioners vis-à-vis the Central
Bank, which is the respondent no. 1 in the present writ petitions.
Hence, the Central Bank cannot have an additional or independent
cause of action beyond that of the lead Bank or the subject-matter of
the NCLT proceeding.
22. Even from the averments recorded in the Show-cause Notice and the
Willful Defaulter Decision, it is found that the sole allegation, under
Clause 2.1.3(b) of the Master Circular, was not substantiated. The
said Clause, read with Clause 2.2.1(c), makes it mandatory that for an
allegation of diversion of funds or willful default to be made, it has to
be established that the petitioners channelized the funds received by
way of loan from the Consortium of Banks for any "other purpose"
than that for which the loan was intended.
23. Moreover, the Bank had to substantiate that the alleged transactions
were made by the petitioners from the money which was given by way
of the loan/credit by the Consortium.
24. Several allegations have been made regarding fixed deposits being
opened, furniture and cars having not been shown as assets, etc. The
petitioners categorically refuted the claims by contending that there
was no link between the credit taken from the Consortium and the
utilization of such assets/funds. Hence, having failed to substantiate
any link between the loan granted and the use alleged and in the
absence of any material to substantiate that the loan was used for any
other purpose than that intended, the very premise of the willful
defaulter declaration goes.
25. The Bank, vainly, has sought to project that the NCLT order was
confined to the TAR not being used for lodging criminal complaints.
26. However, an isolated extraction of one paragraph/sentence out of the
NCLT order cannot serve the purpose sought to be achieved by the
Bank. The finding-in-question regarding the TAR not to be used for
lodging criminal complaints was a corollary of the entire purport of the
decision of the NCLT, which refused to accept the veracity of the TAR
as a whole in several paragraphs. Moreover, lodging of criminal
proceedings in the present context is a mere follow-up action of a
willful defaulter declaration within the contemplation of the Master
Circular and does not stand on an independent footing. The said
observation, thus, was not restricted to lodging of criminal complaints
but the allegations made in the TAR were disbelieved as a whole.
27. The Bank also argues that the Central Bank of India, being a
constituent of the creditor-Consortium, could have proceeded with the
willful defaulter proceeding despite no specific allegation regarding the
loan given by the Central Bank having been referred to either in the
Show Cause or the TAR or the First Committee order.
28. Suchargument is wholly untenable. If the respondent-Bank seeks to
take refuge of its being a constituent of the Consortium, it is bound by
the decision of the lead Bank, the PUNJAB NATIONAL BANK, to drop
the charges of willful defaulter in terms of the NCLT Order refuting the
TAR.
29. On a stand-alone footing, on the other hand, the Central Bank of India
has no charges to fall back upon vis-à-vis any transaction done by the
petitioners in respect of the Central Bank. Thus, seen from both
perspectives, the respondent no. 1-Bank does not have a cause action
against the writ petitioners at all.
30. Insofar as the RC decision is concerned, the less said the better.
31. A gross mechanical approach has been adopted by the RC in passing
the said order. As many as twenty-one individual entities were
clubbed together for the purpose of review of declaration of willful
defaulters in a single meeting. The borrower-Company was one of the
said entities. In the column "Details of Personal hearing, if any
[Stage-(II)]", the Bank has only narrated about the fact that a hearing
was given and of the filing of the writ petitions.
32. In Item 21, containing the reasons for willful default, the sole reliance
was on the TAR, some of the observations of which were merely
quoted. In a cryptic one-liner following such quotation, the RC held
that based on the above points, it was found that funds have been
diverted from the system by the borrower. The sole reliance placed
was on Criterion 2.1.3(b) of the Master Circular which has been
discussed above. Along with the petitioners, other entities were also
clubbed and similar observations made. At the end of the minutes,
the RC, in a went on to observe blandly that it proposes to review the
decision of the First Committee in respect of the above entities and its
Director/guarantors. The resolution was that if approved, the
resolution following the comment was to be passed. The "resolution"
was merely that the Committee had reviewed the decision taken by the
First Committee in respect of the twenty-one entities, the names of
which were listed mechanically, and that the Company, its
Director/proprietor/partners/guarantors be declared as Willful
Defaulters, which were approved.
33. The said meetingsis nothing but a travesty of justice, flouting all
norms of natural justice and the provisions of the Master Circular
itself. In State Bank of India vs. Jah Developers Private Limited and
Others, reported at (2019) 6 SCC 787, the detailed modalities to be
adopted by the First Committee and the RC were discussed by the
Supreme Court. The Supreme Court, in paragraph no. 24 of the said
judgment, laid down inter alia that after the First Committee decision,
the borrower canrepresent 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 Supreme Court held
that the Review Committee must then pass a reasoned order on such
representation which must then be served on the borrower.
34. Apart from serving the minutes of the meeting late, there is no
reasoned order at all in the present case by the RC which vitiates the
decision of the RC on such count alone. However, the observations
made hereinabove vitiate the First Committee decision itself, thus
rendering the RC decision an exercise in futility ab initio.
35. In view of the above observations, the decision of both the First
Committee and the RC declaring the petitioners to be Willful
Defaulters are hereby set aside and quashed.
36. Accordingly, WPO No. 633 of 2023 and WPO No. 212 of 2024 are
allowed on contest, thereby setting aside and quashing the decisions
of the Willful Defaulters Identification Committee and the Review
Committee declaring the petitioners to be Willful Defaulters. All
consequential steps taken in pursuance thereof, including the
uploading of the names of the petitioners as Willful Defaulters, shall
immediately be reversed by the respondents.
37. There will be no order as to costs.
38. Urgent certified server copies, if applied for, be issued to the parties
upon compliance of due formalities.
( Sabyasachi Bhattacharyya, J. )
