Delhi High Court
Bijay Madan Thr Power Of Attorney ... vs Punjab National Bank on 17 January, 2017
$~15 & 16.
* IN THE HIGH COURT OF DELHI AT NEW DELHI
+ W.P.(C) 5004/2016 and CM APPL. 20900/2016
BIJAY MADAN THR POWER OF ATTORNEY SONAL MADAN
..... Petitioner
Through: Mr. Dattatray Vyas, Advocate with
Ms. Sonal Madan in person.
versus
PUNJAB NATIONAL BANK ..... Respondent
Through: Mr. S.N. Relan, Advocate with
Mr. Abhinav Thareja, Advocate
+ W.P.(C) 5012/2016 and CM APPL. 20917/2016
SONAL MADAN ..... Petitioner
Through: Mr. Dattatray Vyas, Advocate with
petitioner in person.
versus
PUNJAB NATIONAL BANK ..... Respondent
Through: Mr. S.N. Relan, Advocate with
Mr. Abhinav Thareja, Advocate
CORAM:
HON'BLE MS. JUSTICE HIMA KOHLI
ORDER
% 17.01.2017
1. The petitioners herein (husband and wife) who are Directors of M/s
Skan Cables & Wires Pvt. Ltd. (hereinafter referred to as „the company‟)
have filed these petitions praying inter alia for issuance of a writ of
mandamus, for quashing the letter dated 15.01.2016, issued by the
respondent/Bank, calling upon them to regularise their accounts, failing
which the Bank shall publish their photographs in the newspapers, declaring
them as wilful defaulters. The petitioners also seek quashing of the letter
dated 14.03.2016, issued by the respondent/Bank, declaring them as wilful
defaulters.
2. As the facts of both the cases are stated to be common, with the
consent of the counsels for the parties, both the petitions are being disposed
of by a common order. Before considering the submissions made by learned
counsel for the petitioners, it is deemed appropriate to briefly refer to the
relevant facts that culminated in issuance of the impugned letters dated
15.01.2016 and 14.03.2016 by the respondent/Bank.
3. As per the averments made in the petitions in the year 2008-09, the
company had approached the respondent/Bank, for financial assistance. The
respondent/Bank had granted various facilities to the company and to secure
its interest, the petitioners had offered to mortgage four immovable
properties with the respondent/Bank. Due to the general recession in the
market and other circumstances, the petitioners could not adhere to the
repayment schedule fixed by the respondent/Bank and resultantly, on
29.06.2010, the company was classified as NPA. On 01.07.2010, the
respondent/Bank issued a notice to the petitioners under Section 13(2) of the
SARFAESI Act, seeking an amount of Rs.1523.46 lacs. On 28.10.2010, the
respondent/Bank proceeded to take over the physical possession of three out
of four of the immovable properties that were offered by the petitioners as
security.
4. On 20.06.2011, the company approached the respondent/Bank
offering to repay the entire liability within a period of three months and
sought permission to sell the mortgaged properties. Though it is the stand of
the petitioners that the proposals of a One Time Settlement made by the
company to the respondent/Bank were turned down, counsel for the
respondent/Bank disputes the said submission and states that the petitioners
were accommodated time and again and the One Time Settlement proposals
made by them were accepted but each time, the company had failed to
adhere to the proposals and had committed defaults.
5. On 29.06.2011, the respondent/Bank informed the petitioners through
an e-mail, of its intention to take further measures to recover its outstanding
dues. It is the submission of the counsel for the respondent/Bank that as on
date, the company owes the Bank a sum of Rs.24,80,18,027.92 paise, which
figure is however disputed as incorrect by learned counsel for the
petitioners. The petitioners claim that they had promptly responded to the e-
mail dated 29.06.2011 sent by the respondent/Bank and had sought
permission to make an offer of a One Time Settlement proposal and they
had also held discussions with the Bank officers but nothing concrete had
materialised.
6. Between the years 2013-2016, the three immovable properties owned
by the petitioners were auctioned by the respondent/Bank and the sale
proceeds of Rs.9.13 crore were adjusted against the outstanding dues. On
22.02.2013, the respondent/Bank filed O.A. No.35/2013 before the DRT-III,
Delhi for recovering the remaining outstanding amounts from the petitioners
alongwith interest. It is not out of place to mention here that aggrieved by
the action of the respondent/Bank of auctioning the three immovable
properties, the petitioners had challenged the same before the DRT-I,
Chandigarh, which petition was dismissed in the year 2015 and the appeal
filed by them against the said rejection order was also dismissed by the
DRAT in March, 2016.
7. On 03.01.2014, the respondent/Bank issued a notice to the petitioners,
calling upon them to show cause as to why should they not be declared as
wilful defaulters. A perusal of the records reveals that the petitioners did not
file any reply to the aforesaid notice to show cause, nor is there any
averment made in the petition to the said effect.
8. On 03.03.2014, the Grievance Redressal Committee constituted by
the respondent/Bank held a meeting, which was attended by Shri Bijay
Madan, the petitioner in W.P.(C) 5004/2016. Taking note of the explanation
offered by the said petitioner on the proposal to declare him and his wife as
wilful defaulters, the Committee decided to defer the matter, while calling
upon him to come forward with a concrete action plan for settlement of the
Bank‟s dues within one week and thereafter meet the Field General Manager
or the General Manager, Headquarters Office of the Bank.
9. The next relevant date is 02.07.2015, when a meeting of the
Committee for Identification of Wilful Defaulters constituted by the
respondent/Bank, took place. In the said meeting, Ms. Sonal Madan, the
petitioner in W.P.(C) 5012/2016 was present. After hearing the said
petitioner and noting that the borrowers had not complied with the
commitments made in the meeting dated 03.03.2014, the company and the
petitioners as the Directors thereof, were declared as wilful defaulters. This
was followed by issuance of the impugned notice dated 15.01.2016,
addressed by the respondent/Bank to the petitioners, once again calling upon
them to regularise their accounts within 30 days from the date of receipt of
the said notice, failing which they were cautioned that the Bank will have no
option but to publish their photographs in the newspapers, declaring them as
wilful defaulters. The said notice mentioned that on the date of issuance, a
sum of Rs.22,43,64,507/- plus interest, cost etc. was payable by the
petitioners minus the recovered amount, which has not been specified
therein.
10. On 14.03.2016, the impugned order came to be passed by the
respondent/Bank stating inter alia as below:-
"Dear Sir/Madam,
Reg: M/s Skan Cables & Wires Pvt. Ltd. - Declaration as
Wilful Defaulter
As you are aware, your company has been availing various
credit facilities from the bank and the account has since been
classified as Non Performing Asset (NPA) w.e.f. 29.06.2010.
2. The company has committed the following events of default
within the meaning of RBI guidelines on Wilful Defaulters:
"You have defaulted in meeting its payment/repayment
obligations to the Bank even when you have the capacity to
honour the said obligations."
3. The Committee for Identification of Wilful Defaulters
constituted by the bank has identified your company as a Wilful
Defaulter and a show cause notice to this effect was sent to you.
4. Your company did not respond to the said notice within the
stipulated time mentioned in the notice. It is clear that your
company did not have anything to justify the event of default
and hence the Committee decided to declare your company as a
wilful defaulter in terms of RBI guidelines.
OR
The submission made by your company in response to the said
notice was not acceptable to the bank and you were given an
opportunity to represent either personally or through your
authorised person, before the Committee for Identification of
Wilful Defaulters. The Committee was not satisfied with the
submissions made on your behalf and Committee reached to the
conclusion that the company has committed event of default as
mentioned therein above.
5. In view of the above facts, the Special Committee of Board of
the bank in its meeting approved the decision of the Committee
and accordingly declared the company as a wilful defaulter.
6. As per RBI guidelines, the details of the company as well as
of the Directors will be forwarded to the Credit Information
Agencies and you will not be eligible for any additional finance
from the Banks/FIs. The bank will also be considering filing of
criminal case against the company as well as its Directors and
you will be responsible for the consequences thereof.
You are once again called upon to take immediate steps for
resolution of the account."
11. Aggrieved by the notice dated 15.01.2016 and the letter dated
14.03.2016, the petitioners have filed the present petitions.
12. Learned counsel for the petitioners submits that the impugned letter
dated 14.03.2016 shows a complete non-application of mind on the part of
the respondent/Bank as they have failed to furnish the grounds for declaring
the petitioners as wilful defaulters and instead, taken alternate grounds in
para 4, without stating as to which of the two grounds applies to the facts of
the case.
13. Learned counsel for the petitioners also refers to the Master Circular
on Wilful Defaulters dated 01.07.2014 (hereinafter referred to as „the
Circular‟) enclosed with a letter dated 01.07.2015, circulated by the RBI to
all Scheduled Commercial Banks and Financial Institutions (Annexure P-20)
and states that Clause 2.1.3 of the said Circular that describes `wilful
default‟ and refers to four different events which could have occurred on
wilful default. He contends that the respondent/Bank has miserably failed to
adhere to the mechanism laid down by the RBI in the said Circular for
identification of wilful defaulters.
14. Per contra, Mr.S.N.Relan, learned counsel for the respondent/Bank
opposes the present petition on the ground that the Bank had granted
repeated opportunities to the petitioners and the company to make good the
defaults and regularise their accounts but they had miserably failed to do so.
They were also permitted to propose a One Time Settlement, which they did
on three occasions, but each time, the petitioners had defaulted, leaving the
Bank with no other option but to auction the three immovable properties
offered as security. He further states that the meeting of the Grievance
Redressal Committee held on 03.03.2014 was duly attended by Shri Bijay
Madan and that of the Committee for Identification of Wilful Defaulters
held on 2.7.2015, was attended by Ms.Sonal Madan and it was in their
presence that it was decided to declare them and the company as wilful
defaulters, in terms of the RBI guidelines.
15. The Court has heard the arguments advanced by learned counsels for
the parties and carefully perused the documents on record, particularly the
Master Circular on Wilful Defaulters dated 1.7.2014 issued by the RBI, on
which both the parties have placed reliance.
16. Clause 2.1.3 of the Master Circular, which deals with wilful default, is
reproduced hereinbelow for ready reference:-
"2.1.3 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 wilful default should be made
keeping in view the track record of the borrowers and
should not be decided on the basis of isolated
transactions/incidents. The default to be categorised as
wilful must be intentional/deliberate and calculated"
17. Clause 3 of the Master Circular that prescribes the mechanism for
identification of Wilful Defaulters is also relevant and is reproduced
hereinbelow:-
"3. Mechanism for identification of Wilful Defaulters
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/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 Order declaring a borrower as a wilful defaulter, then
the Review Committee need not be set up to review such
decisions. ........"
18. Clause 2.1.3 of the Master Circular refers to the events that could
occur for a wilful default to happen. The said Clause stipulates that the
entire track record of the borrower must be examined for identification of
wilful default and such a default ought to be intentional, deliberate and
calculated. Clause 3 prescribes a mechanism for identification of wilful
defaulters and requires the Banks to constitute two tier system; firstly an
Identification Committee must be established, headed by the Executive
Director or equivalent and consisting of two other senior officers of the rank
of GM/DGM to examine the evidence of wilful default on the part of the
borrower company and its promoter/whole-time director. On examining the
available evidence, if the said Committee arrives at a conclusion that an
event of wilful default has taken place, it is required to issue a notice to
show cause to the borrower company and its promoter/whole-time director,
calling for a response/explanation. Only after an opportunity is granted to
the addressee of the notice to show cause and a personal hearing is given to
them, can the Committee arrive at any conclusion about the wilful default.
As a safety measure, a second and higher tier has been directed to be
constituted by the RBI, described as the Review Committee. The Review
Committee must be headed by the Chairman/Chairman & Managing
Director/Managing Director & Chief Executive Officer/CEOs of the Bank
and include two independent directors/non-executive directors. Once the
Identification Committee passes an order, declaring the borrower as a wilful
defaulter, the Review Committee is expected to examine the said order and
only if satisfied with the decision taken, confirm the same.
19. It is the contention of the learned counsel for the petitioners that the
respondent/Bank has not followed the prescribed mechanism for
identification of wilful defaulters inasmuch as the Identification Committee
required to be constituted by the Bank did not grant a hearing to the
petitioners and bypassing the said Committee, the second tier, i.e., the
Review Committee, given the nomenclature of a Grievance Redressal
Committee by the respondent/Bank, had granted a hearing to them on
03.03.2014.
20. The records reveal that the meeting of the Grievance Redressal
Committee was held on 03.03.2014, whereas the Committee for
Identification of Wilful Defaulter held a meeting thereafter, on 02.07.2015.
Thus, there was no scope of the Review Committee scrutinizing the order of
the Identification Committee, as stipulated in Clause 3(b) and (c) of the
Master Circular for the simple reason that by the date the Grievance
Redressal Committee held a meeting on 3.3.2014, the Identification
Committee had not even assembled to examine if the petitioners were wilful
defaulters as contemplated under Clause 2.1.3 of the Circular. Evidently,
the respondent/Bank has reversed the entire procedure laid down by the RBI
by putting the cart before the horse.
21. Learned counsel for the respondent/Bank does not dispute the fact that
the petitioners were not afforded a hearing by the Identification Committee
before an order came to be passed by the Grievance Redressal Committee on
03.03.2014. It is however, a different matter that the Grievance Redressal
Committee did not pass any adverse orders against the petitioners on
3.3.2014 and had only deferred the matter to enable them to come up with
an action plan for settling the Bank‟s dues. Thereafter, the respondent/Bank
stayed its hands for over one year till July, 2015 when the Identification
Committee held a meeting on 02.07.2015, which was attended by Ms. Sonal
Madan, the petitioner in W.P.(C) 5012/2016.
22. The glaring flaw in the procedure followed by the respondent/Bank,
which is apparent from a perusal of the minutes of the meeting of the
Identification Committee held on 02.07.2015, is that once the said
Committee arrived at a conclusion that the petitioners and the company were
wilful defaulters, then the said order was mandatorily required to be
reviewed by another Committee described in Clause 3(c) of the Circular, as
the Review Committee, headed by the Chairman/Chairman and Managing
Director or the Managing Director and CEO and consisting in addition, of
two independent Directors of the Bank. Only after they had satisfied
themselves that the decision of the Identification Committee was justified,
was the said order to be confirmed.
23. Admittedly, the order dated 02.07.2015 passed by the Identification
Committee was never placed before the Review Committee. In such
circumstances, it has to be held that the respondent/Bank has followed the
procedure laid down in Clause 3 (c) of the Master Circular more in breach
and it could not have issued the impugned notices dated 15.01.2016 and
14.03.2016 on the recommendations of the Identification Committee.
24. The aforesaid oversight on the part of the respondent/Bank in failing
to adhere to the mechanism laid down by the RBI in the Master Circular for
identification of wilful defaulters, goes to the root of the matter and is
considered as a sufficient ground for quashing and setting aside the
impugned communications dated 15.01.2016 and 14.03.2016. Even
otherwise, the impugned communication dated 14.03.2016 is legally
unsustainable because the respondent/Bank has failed to apply its mind
while issuing the said letter. In para 4 of the said notice, the
respondent/Bank has listed alternate grounds for holding the petitioners as
wilful defaulters, without clarifying as to which of the two grounds has
been invoked, based on which the Identification Committee had declared
them as wilful defaulters.
25. As a result, the present petitions succeed and the impugned notices
dated 15.01.2016 and 14.03.2016 are quashed and set aside. The clock is set
back to 02.07.2015, the date on which the Identification Committee had held
a meeting and declared the petitioners and the company as wilful defaulters.
The respondent/Bank is directed to place the decision of the Identification
Committee before the Review Committee, for being reviewed, as per the
procedure prescribed in the Master Circular circulated by the RBI. Only
after the Review Committee examines the orders passed by the
Identification Committee, shall it proceed to pass appropriate orders, under
written intimation to the petitioners. If the petitioners are aggrieved by the
orders that may be passed, they shall be entitled to seek the remedies, as
may be available to them in law.
26. The petitions are disposed of alongwith the pending applications,
while leaving the parties to bear their own costs.
HIMA KOHLI, J
JANUARY 17, 2017
rkb/mk
