Gujarat High Court
M/S Ashka Exim vs The Authorised Officer, Bank Of Baroda ... on 6 February, 2024
Author: Sangeeta K. Vishen
Bench: Sangeeta K. Vishen
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IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 6193 of 2022
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M/S ASHKA EXIM
Versus
THE AUTHORISED OFFICER, BANK OF BARODA (ERSTWILE VIJAYA
BANK)
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Appearance:
MR.ADITYA J PANDYA(6991) for the Petitioner(s) No. 1,2,3
MS NALINI S LODHA(2128) for the Respondent(s) No. 1
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CORAM:HONOURABLE MS. JUSTICE SANGEETA K. VISHEN
Date : 06/02/2024
ORAL ORDER
1. By this petition, the petitioners have prayed for quashing and
setting aside the declaration dated 25.01.2022 made by the
respondent whereby, the petitioners have been declared as wilful
defaulters.
2. Brief facts, as can be culled out from the captioned writ
petition, are as under:
2.1 Petitioner no.1 was enjoying the cash credit facilities to the
tune of Rs.4,50,00,000/- and ad-hoc cash credit facility to the tune
of Rs.25,00,000/- from the respondent bank. The petitioners have
maintained this facility for some time. Owing to the market
conditions and resultant down fall, the business of the petitioners
was gravely affected and since mid of 2019, there was some default
on its part. Account of the petitioners was declared as Non-
Performing Assets and proceedings were initiated under the
provisions of the Securitisation and Reconstruction of Financial
Assets and Enforcement of Security Interest Act, 2002 (hereinafter
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referred to as "the Act of 2002").
2.2 Show cause notice dated 12.03.2021 was issued requiring the
petitioners to show cause as to why the account and the petitioners,
be not classified as wilful defaulters. According to the petitioners,
show cause notice was not accompanied with any documents and
materials in support of the grounds/charges leveled against the
petitioners. A detailed reply was filed by the petitioner, inter alia,
explaining two grounds which were raised in the show cause notice.
The petitioners were also given an opportunity of hearing on
14.07.2021 and the petitioners had, in detail, indicated as to how
the petitioners cannot be classified as wilful defaulters inasmuch as,
petitioners have observed all the discipline of the account regularly
and that there was occasion to the petitioners to deviate from any
of the said discipline. Thereafter, petitioners have received the
communication dated 24.08.2021 of the Chief Manager, Recovery
Department, inter alia, pointing out that after hearing borrower and
perusing the documents on record, the Committee of Executives on
wilful defaulters of bank (hereinafter referred to as "the Committee
of Executives") has decided to declare the petitioners as a wilful
defaulters on the grounds mentioned in the show cause notice.
Petitioners were never aware about the said communication dated
24.08.2021. The decision of the Committee of Executives dated
14.07.2021, was forwarded to the Review Committee and the
Review Committee, in its meeting held on 29.12.2021, confirmed
the decision of the Committee of Executives which, was received by
the petitioners. Being aggrieved, that the captioned writ petition has
been filed.
3. Mr Aditya J. Pandya, learned advocate appearing for the
petitioners submitted that the captioned writ petition has been filed
mainly raising four grounds namely; (i) violation of principles of
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natural justice; (ii) that no order is passed; (iii) if passed, the same is
not served upon the petitioners and (iv) material/document has not
been supplied to the petitioners.
3.1 It is submitted that cash credit facility was provided by the
respondent bank. Owing to the alleged default, that show cause
notice dated 12.03.2021, came to be issued raising grounds namely;
(i) that as per the Income Tax Report of Assessment Year 2016-
2017, the net worth of petitioner no.2 was Rs.14.81 lakhs which
shows that he has sufficient capacity to honour the obligation and
(ii) as per the last Unit Inspection Report dated 16.11.2019, there
was no stock found at the unit and also the unit was closed. It was
alleged that the stock has been sold by the petitioners without the
permission of the bank and the sale proceeds has not credited in the
account. To which, the petitioner has filed the reply, explaining that
every year, it is not necessary that net worth would increase and
the same depends upon the market/industry in which the party is
dealing. The petitioner also had furnished the reason that from the
Financial Year 2018-2019, the performance of the industry was not
up to the mark which, affected the small players and mid size
players and the petitioners, were not exception. The clarification for
the another ground, was also provided that the petitioners have
closed the business and the stock-in-hand provided by the suppliers,
were not free of cost. The gross profit ratio was hardly 6 to 7
percent and net profit ratio, was 3 to 4 percent. Justification, was
also provided that requirement of the bank that entire sales
proceeds is to be deposited towards the bank loan, is not feasible as
the petitioners have to pay to the sundry creditors as well.
3.2 It is submitted that the respondent bank, had also exercised
the discretion of offering the personal hearing to the petitioners,
when the petitioner had remained present and explained each and
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every aspect; however, thereafter, nothing was heard and to the
shock of the petitioners, a communication dated 24.08.2021, was
issued. It is submitted that the said communication, was never
served upon the petitioners. Besides, the communication is signed
by the Chief Manager, Recovery Department, Mumbai Zone who is
not an authority to take a decision. Similarly, the decision of the
Review Committee has been issued vide communication dated
25.01.2022; however, a bare perusal of the said communication,
suggest that there is no justification coming forth, as to how, the
clarifications provided by the petitioners, have been dealt with. It is
submitted that it appears that a decision was taken by the Review
Committee in its meeting held on 29.12.2021; however, the same is
also not provided to the petitioners.
3.3 It is submitted that both the communications dated
24.08.2021 and 25.01.2022, cannot be said to be a decision but a
communication and that too, issued by the Chief Manager, Recovery
Department and Deputy General Manager, Mumbai Zone
respectively who were not the authorities as per the Master Circular
on Wilful Defaulters to issue the orders. It is further submitted that
even the documents on which reliance has been placed and the
decision has been taken, were never provided to the petitioners and
more particularly, the Unit Inspection Report which fact, is
strengthened by the affidavit of the respondent bank whereby,
there is a clear admission that the copy of the Unit Inspection
Report dated 12.03.2021, has not been served upon the petitioners.
3.4 It is further submitted that during the course of hearing, this
Court, was kind enough to pass an order dated 26.09.2023 acceding
to the request of learned advocate for the respondent bank so as to
take instruction as to whether any reasons are assigned in the
minutes of the Committee of Executives or not. Apropos which,
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further affidavit has been filed. By the said order, the respondent
bank, was expected to state as to whether any reasons are assigned
in the minutes of the Committee of Executives or not, instead, what
has been stated in paragraph 2.3 is only the fact that in the meeting
held on 14.07.2021, the Committee of Executives has decided to
hold the process while observing that the bank will declare the
petitioners as a wilful defaulters after reasonable time. It is
submitted that what the Court expected of the respondent, was to
provide the details as to whether any reasons are assigned but the
affidavit, is silent on the said aspect. Therefore, clearly, no reasons
are assigned. In fact, no orders have been passed and even if
passed, the same are not placed on the record of the captioned writ
petition.
3.5 It is submitted that as per the Master Circular on Wilful
Defaulters and more particularly, clause 3 which provides for
mechanism for identification of the wilful defaulters. It is stated that
sub-clause (b) of clause 3 envisages issuance of the show cause
notice to the concerned borrower and opportunity to be given to the
borrowers and promoters of personal hearing if the Committee feels
such an opportunity is necessary, followed by the order of the
Committee which is to be review by the another Committee i.e. the
Review Committee. It is submitted that sub-clause (c) of clause 3
provides that who can be the members of the Identification
Committee and the Review Committee and definitely, the Chief
Manager, Recovery Department who has issued the communication
dated 24.08.2021 and the Deputy General Manager, Mumbai Zone
who has issued the communication dated 25.01.2022 are not the
authorities.
3.6 It is submitted that sub-clause (c) of clause 3 envisages
passing of the order by the Committee to be reviewed by the
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Review Committee. The Review Committee is to apply its mind
independently and not simplicitor accept what the Committee of
Executives has formed the opinion. Therefore, the Master Circular
on Wilful Defaulters clearly provides for issuance of the show cause
notice and if necessary, personal hearing by the Identification
Committee, followed by passing of the order to be communicated to
the person against whom the order is passed. It is submitted that
none of such steps have been taken in the present case for, after
the issuance of the show cause notice and submission of the reply
by the petitioners on 14.07.2021, the petitioners were never served
with the order of the Committee of Executives. It is submitted that
the infraction, is writ large, more particularly, when such an action
of declaring the petitioners as wilful defaulters entails civil
consequences.
3.7 Reliance is placed on the judgment in the case of Kailash
Shahra v. IDBI Bank Limited reported in 2019 SCC Online Bombay
3279. It is submitted that Bombay High Court, considering the
provisions of the Master Circular, more particularly, clause 3, has
held and observed that documents and records, may be relevant for
enabling the party to effectively defend itself. Further, before a
personal hearing is granted, the party should be aware of the
allegations in the show cause notice with specific details so that it is
able to recollect or the bank is in a position to refresh the memory.
It has also been held and observed that the inbuilt mechanism or
safety valve is that the identification of the wilful defaulter is to be
done in accordance with the Master Circular and secondly, after the
identification is done, a show cause notice has to be issued based
on the order of the Identification Committee and which must be a
reasoned order. After that, show cause notice is issued, an
opportunity has to be given to deal with the allegations in the show
cause notice. The materials then have to be placed before a Review
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Committee and as and when that Review Committee applies its
mind and gives its approval to the order of the Identification
Committee that a finality is attached to it. While referring to the
judgment in the case of Finolex Industries Limited v. Reserve Bank
of India rendered in WPL/345 of 2011 as well as judgment in the
case of Kanchan Motors v. Bank of India rendered in WPL/2072 of
2018, it is submitted that, it has been held and observed that the
whole exercise of declaring a party as a wilful defaulter is not a
mere ritual nor the paras are to be chanted as mantras. The
presence of the word 'evidence' is crucial.
3.8 Reliance is also placed on the judgment of the Apex Court in
the case of State Bank of India v. Jah Developers Private Limited &
Others reported in (2019) 6 SCC 787. The Apex Court, while
considering paragraph 3 of Master Circular, has held and observed
that whether a default is intentional, deliberate, and calculated
would be 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. It has been also held and observed that given the
drastic consequences, it would be clear that the Revised Circular,
being in public interest, must be construed reasonably. The Apex
Court, then, has held and observed that the borrower, be permitted
to make a representation within 15 days of the preliminary decision
of the First Committee, comprising of the Executive Director and
senior officials and after following paragraph 3(b) of the Revised
Circular, 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 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. Therefore, it is more than
clear that there has to be an order passed by the First Committee.
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Therefore, it is an obligation upon the First Committee to give its
order to the borrower as soon as it is made so as to enable the party
to represent against such order within 15 days. Also, the Review
Committee, upon receipt of the representation, must then pass a
reasoned order. Therefore, it is by now well settled that orders are
required to be passed by the Identification Committee or the Review
Committee.
3.9 In the present case, there are no orders except the
communications dated 24.08.2021 and 25.01.2022. Even if, it is
claimed that the orders were passed, the copies have not been
provided to the petitioners and only on this ground, the action of the
respondent bank, being in breach of not only the principles of
natural justice but also against the principles of audi alteram
partem, deserves to be quashed and set aside.
4. On the other hand, Ms Nalini S. Lodha, learned advocate
appearing for the respondent bank, submitted that the apropos the
order passed by this Court on 26.09.2023, that further affidavit has
been filed. It is submitted that the edifice on which the petition is
filed, is erroneous for, the documents claimed by the petitioners and
more particularly the Unit Inspection Report, are available with them
and that there is no necessity of providing those documents to the
petitioners. It is submitted that it is true that Unit Inspection Report
dated 12.03.2021, has not been served upon the petitioners.
Petitioner, in response to the show cause notice, in its reply, has
made a reference of the Unit Inspection Report and as per the said
Unit Inspection Report, it is the case of the petitioners that there
was no stock found at the unit. It is submitted that the petitioners
have been enjoying the cash credit limit of Rs.4.75 crores against
the primary security of the stocks and the petitioners, as per the
terms of the sanction letter and as agreed, were required to route
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all the transactions through the cash credit account and any
payment which were required to be made to the sundry creditors
were also to be routed through the cash credit account but, the cash
credit account of the petitioners would reveal that there has been
no operation in the cash credit account after the mid of year 2019
which fact, is clear from the statement annexed to the reply (pages
74 to 83).
4.1 It is submitted that the petitioners, were issued the show
cause notices raising two grounds and the clarifications have been
provided by the petitioners which, would not be in confirmity with
the record. The petitioners were afforded the opportunity of hearing
before the Committee of Executives which, is evident from the
communication dated 06.07.2021. It is submitted that account of
the petitioners was declared as the Non-Performing Assets which
was followed by the proceedings under the Act of 2002 and since
the petitioners failed, that the respondent has published the sale
notice and one of the mortgaged properties has been sold by way of
an auction and the second auction for the property, could not
fructified in view of it having failed. It is submitted that the
petitioner, apropos the show cause notice, has filed its reply giving
the clarifications; however, in support of the such clarifications, the
petitioners have not produced relevant documents. The only reply
given, is about the increase or decrease of the net worth. It is
submitted that justification which has been provided while replying
to the show cause notice, is very much discernible from the Unit
Inspection Report. The primary security has already gone and the
entire stock, has also been siphoned away. It is an admitted position
that since 29.03.2019, there is no credit in the accounts of the
petitioners except the last credit of Rs.3 lakhs. It is therefore
submitted that when the position, was admitted, the petitioners
cannot have both. The petitioners cannot raise the grievance that
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the petitioners were not heard more particularly when everything
was known to the petitioners.
4.2 It is submitted that even during the pendency of the writ
petition when everything was placed on the record but there is no
justification coming forth from the petitioners.
4.3 It is submitted that so far as the communications dated
24.08.2021 and 25.01.2022 are concerned, clearly, it has been
issued by the Chief Manager, communicating the decision taken by
the Committee of Executives on the wilful defaulters so also the
Review Committee. As per her knowledge, Ms Nalini S. Lodha,
learned advocate, submitted that the Identification Committee and
the Review Committee deals with various cases, decisions are taken
in the meeting which are then minutised and that there is no
practice of passing any separate orders. It is submitted that even
from the communication dated 24.08.2021, it is clear that the
petitioners were offered 15 days' time to file the representation;
however, the petitioners have not filed any representation before
the Review Committee.
5. In the brief rejoinder, Mr Aditya J. Pandya, learned advocate
appearing for the petitioners submitted that mere possession of the
documents by the petitioners would not suffice and will not absolve
the respondent from its responsibility to provide the documents. The
principles of natural justice, have to be followed. It is submitted that
even if the petitioners are in possession of certain documents, the
documents on the basis whereof, show cause notice has been
issued are required to be provided to the petitioners and then, to
pass the order. However, in the present case, after the issuance of
the show cause notice, the petitioners have not been provided with
the Unit Inspection Report which aspect, is admitted by the
respondent in its reply. In absence of any orders passed, it can be
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said that the action of the respondent is in violation of the principles
of natural justice so also the principles laid by the Apex Court in the
case of State Bank of India v. Jah Developers Private Limited &
Others (supra).
6. Heard the learned counsels appearing for the respective
parties and considered the documents available on the record.
7. The petitioners, are aggrieved by the two communications
dated 24.08.2021 and 25.01.2022. The former communication, is
communicating the decision taken by the Committee of Executives
in its meeting dated 14.07.2021 declaring the petitioners, as a wilful
defaulters. It appears that the said communication was served upon
the petitioners; however, it has been denied that the said
communication was never received by the petitioners. Within a
period of 15 days, the petitioners were required to file the
representation before the Review Committee and the Review
Committee was to take a decision. From the record, it appears that
since the communication dated 24.08.2021 was not received, the
petitioners could not file the representation and what came, was the
communication dated 25.01.2022 whereby, the decision of the
Committee of Executives dated 14.07.2021 has been confirmed by
the Review Committee in its meeting convened on 29.12.2021.
8. Various submissions have been made; however, the principal
submission made by Mr Aditya J. Pandya, learned advocate for the
petitioners is that both the communications so also the decisions
taken by the Committee of Executives and the Review Committee
respectively, would be in violation of principles of natural justice for,
the copy of the order passed by the Committee of Executives has
not been supplied to the petitioners except the communication
dated 24.08.2021. Since the same was not supplied, the petitioners
had no occasion to file the representation to the Review Committee
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and Review Committee, without any representation, has taken a
decision, simply confirming the decision of the Committee of
Executives dated 14.07.2021, without independently applying its
mind.
9. Pertinently, show cause notice dated 12.03.2021 was issued
to the petitioners requiring the petitioners to show cause as to why
the accounts of the petitioners be not classified as wilful defaulter.
Apropos the show cause notice, the petitioner has filed its reply
dated 10.04.2021 providing the clarifications to the issues raised in
the show cause notice. It is on 14.07.2021, the Committee of
Executives has provided the petitioners a personal hearing.
Petitioners remained present and a decision was taken by the
Committee of Executives, which is clear from the communication
dated 24.08.2021. It records that the personal hearing before the
Committee of Executives was given to the petitioners on 14.07.2021
when, the petitioner no.2 remained present but he could not justify
the points mentioned in the show cause notice. It further states that
after hearing the borrower and perusing the documents on record,
the Committee of Executives of wilful defaulter has decided to
declare the petitioners as wilful defaulters. The communication,
further proceeds that if the petitioners, are desirous of filing any
representation, it may do so as per the RBI guidelines within 15
days for consideration by the Review Committee. Therefore, from
the record, it appears that in the meeting of Committee of
Executives dated 14.07.2021, a decision has been taken declaring
the petitioners as wilful defaulters. It is thereafter that the
petitioners, had not filed any representation as, according to the
petitioners, said communication was never received by them.
Communication dated 25.01.2022, came to be issued by the Review
Committee which reproduces the contents of the show cause notice
and the factum of the hearing on 14.07.2021. The communication,
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further states about intimation of the decision vide letter dated
24.08.2021 and the fact that the Review Committee has not
received any further representation or response from the
petitioners. With this, the Review Committee, in its meeting held on
29.12.2021, took a decision confirming the decision of the
Committee of Executives on wilful defaulters. The Review
Committee, therefore, confirmed the decision of the Committee of
Executives dated 14.07.2021.
10. The issue which therefore arises for the consideration of this
Court is that the decision taken by the Committee of Executives in
its meeting dated 14.07.2021 as well as 29.12.2021 by the Review
Committee, can be said to be decision in confirmity with the
provisions of either the Master Circular on Wilful Defaulters or the
principles laid down by the Apex Court in the case of State Bank of
India v. Jah Developers Private Limited & Others (supra). Before
adverting to the said contention, relevant, would be the provisions
of the Master Circular on Wilful Defaulters. The relevant clauses of
clause 3 of the Master Circular on Wilful Defaulters read thus:
"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."
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(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."
11. Evidently, clause (a) provides for composition of the Review
Committee to examine evidence of wilful default. The said
Committee should be headed by an Executive Director or equivalent
and consisting of two other senior officers of the rank of GM/DGM.
As per clause (b), the Committee has to conclude that an event of
wilful default has occurred and to issue the show cause notice to the
concerned borrower and the promoter/ whole-time director and call
for the submissions. After considering the submissions, the
Committed is to issue an order recording the fact of wilful default
and the reasons for the same. Opportunity of personal hearing, is
also envisaged if the Committee feels such an opportunity is
necessary. Therefore, clearly what clause (b) envisages is issuance
of the order recording the fact of wilful default and the reasons for
the same. Meaning thereby, the order, should not only record the
facts but also the reasons for declaring the person as a wilful
defaulter. Personal hearing is at the discretion of the Committee. In
the present case, it is not in dispute that vide communication dated
06.07.2021, an opportunity was afforded which, was availed of by
the petitioners by remaining present on 14.07.2021. Further, clause
(c), provides that the order of the Committee should be reviewed by
another Committee. The composition of the Committee is also by
the officials of the bank which, are required to review the order
passed by the Identification Committee. It states that the order shall
become final only after it is confirmed by the said Review
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Committee. Therefore, passing of the order is inevitable coupled
with the recording of the facts and the reasons.
12. At this stage, apt would be the judgment in the case of State
Bank of India v. Jah Developers Private Limited & Others (supra) and
more particularly paragraph 24. The Apex Court, has held and
observed that whether a default is intentional, deliberate, and
calculated would be 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. The Apex Court, has pointed out that the
moment a person is declared to be a wilful defaulter, the impact on
its fundamental right to carry on business as per Article 19(1)(g) is
direct and immediate 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. The Apex Court, therefore, while considering the
Master Circular 2015 and more particularly, clause 3 has held and
observed that the first Committee, after following para 3(b) shall
pass an order and must gave its order to the borrower as soon as it
is made. It has been further pointed out that the borrower can then
represent against such order within a period of 15 days to the
Review Committee. The Review Committee must then pass a
reasoned order on such representation which must then be served
on the borrower. Therefore, passing of the reasoned order by the
Committee of Executives so also the Review Committee, is must and
in furtherance of the principles of natural justice. One cannot shirk
by saying that the communication has been issued and the decision
has been taken by the Committee of Executives in its meeting. It
cannot be said to be a sufficient compliance. What presupposes
passing of the order, is application of mind by the Committee of
Executives to the facts and the documents available on record and
then to come to the conclusion as to why the explanation or
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justification offered by the party, is not acceptable. Paragraph 24
reads thus:
"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 paragraph 3 of the Revised
Circular dated 01.07.2015, as it is clear that the events of
wilful default as mentioned in paragraph 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 wilful 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 wilful defaulter, and a promoter/director of a wilful
defaulter cannot be made promoter or director of any other
borrower company. Equally, under Section 29A of the
Insolvency and Bankruptcy Code, 2016, a wilful 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 paragraph 3 of the Master
Circular dated 01.07.2013 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 paragraph 3(b) of the Revised Circular dated
01.07.2015, 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 01.07.2013 itself considered such steps to be
reasonable, we incorporate all these steps into the Revised
Circular dated 01.07.2015. The impugned judgment is,
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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."
13. At this stage, judgment of the Bombay High Court in the case
of Kailash Shahra v. IDBI Bank Limited (supra) is also worth referring
to. Paragraphs 38 and 40 of the said judgment read thus:
"38. The judgment delivered in the case of Finolex Industries
(supra), with great respect, rightly concludes that this Master
Circular contemplates a two stage inquiry by the bank. Paras
37, 38 and 39 of this judgment are extremely relevant. Para
41 sets out the consequences of wilful default. These are
indeed drastic and serious. Therefore, the Division Bench
says that absent compliance with the procedural norms and
and upon breach of the principles of natural justice, the
decision would stand vitiated. In the later decision in the case
of Kanchan Motors (supra), the Division Bench reiterated the
position, after referring to the Master Circular, in the following
words:-
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 Clause 2.1.3.(a) to (d) as the case may
be. The Master Circular also provides a
mechanism 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.
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.....
18. 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 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 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 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 29 th January, 2018 to show
cause notice against proposed declaration of
wilful defaulter have not been considered and that
as to why the Petitioners were denied the
opportunity of being heard.
19. 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.
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.....
21. 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 reply dated 29 th January,
2018 the Petitioners have raised various grounds
opposing the proposed action of declaring them
wilful 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 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.
40. We do not see any substance in the argument of
Mr.Pandit that in this case the Master Circular need not be
given an interpretation as placed by the Hon'ble Supreme
Court in a decision of the year 2019 [State Bank of India
(supra)]. As early as on 24 th August, 2011, this court
interpreted the Master Circular in Finolex case (supra).
Therefore, it was always the understanding of this court that
this Master Circular to be implemented, enforced and
imposed effectively and efficiently requires compliance with
the principles of natural justice. True it is that mere allegation
of breach of principles of natural justice is not enough. The
breach will have to be established and proved. The findings in
the order of the Identification Committee may be tentative
and prima facie and no finality is attached to it unless a
review of the same by a high power committee is taken. But,
at least at that stage, it is necessary that principles of natural
justice are complied with. The paragraphs of the circular,
therefore, are interpreted by the banks to conclude that no
breach occurs of such principles even if the relevant and
germane materials are withheld and the version of the
alleged wilful defaulters is not taken into consideration or
brushed aside by the Review Committee. These are not
empty formalities. There is no paper compliance
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contemplated by law. A serious deliberation and due
consideration is required at the hands of this high power
committee. It must identify the wilful defaulter all over again
and afresh by bearing in mind the definitions in the
Companies Act, 2013, particularly of the term "officer in
default". There has to be a clear default attributable to the
Director. If he is not a whole-time Director, then, there is a
requirement in the definition itself of alleging, establishing
and proving his consent by not raising any objection and by
active participation in deliberations and discussions of the
Board of Directors of that particular company. In the event
there is a case made out of collusion, then, details,
particulars of the same are required to be referred to and
thereafter, the allegations should be established and proved
with cogent and satisfactory materials. The reasons assigned
by the Identification Committee are open for independent
scrutiny of the the Review Committee."
14. In the present case, except the two communications, nothing
has been placed on the record to suggest that order has been
passed by the Committee of Executives. This Court, therefore, has
required the respondent bank to place it on record any reasons
assigned in the minutes of the meeting of the Committee of
Executives. By filing further affidavit, pursuant to the order passed
by this Court, the explanation offered and which can be culled out
from paragraph 2.1 to 2.3 read thus:
"2.1 I state that as directed by the COE in its meeting held on
06.03.2021, Zonal Office, Mumbai issued SCN to the borrower /
partners and guarantors, the petitioners herein on 12.03.2021.
In response to the SCN, representation was made vide letter
dated 10.04.2021 and COE in its meeting held on 05.06.2021
consented for personal hearing and called them on
14.07.2021.
2.2 I further state that Mr. Manish S. Shah, partner and
guarantor was present before the Committee through Microsoft
Teams App at Zonal Office, Mumbai but they could not justify
the points mentioned in SCN and requested for some more
time.
2.3 I state that taking into consideration the SCN, the
representation to SCN and based on hearing before COE in its
meeting held on 14.07.2021, the COE decided to hold the
process for time being while observing that the bank will
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declare M/s. Ashka Exim and its partners / guarantors Mr. Rohit
Narayandas Patel and Mr. Manish S. Shah as willful defaulters
after a reasonable time."
15. Discernibly, in paragraph 2.3, all what has been stated is that
Committee of Executives in its meeting held on 14.07.2021 has
decided to hold the process for time being while observing that the
bank will declare the petitioners as a wilful defaulters after a
reasonable time. Therefore, it is difficult to accept that any decision,
was taken in the meeting on 14.07.2021 by the Committee of
Executives. Though it has been vehemently argued before this Court
that a decision was taken and there may not be any separate order
passed by the Committee of Executives; the said vehemance shown
would not be in tune with the principles of natural justice for, when a
person is declared a wilful defaulter, it entails all the civil
consequences and what the authority is expected is to pass a
reasoned order so as to enable the party to meet with each and
every grounds raised and not accepted by the Committee.
Therefore, it cannot be said that any order was passed by the
Committee of Executives. Mere communication would not suffice to
substantiate or to justify the decision of the Committee of
Executives.
16. Adverting to the order passed by the Review Committee, it is
required to be noted that the communication can hardly be said to
be a communication of the decision of the Review Committee. As
discussed hereinabove, the communication, sets out the facts
starting from the issuance of the show cause notice; the grounds;
reply of the petitioners; personal hearing dated 14.07.2021 and no
justification by the petitioners and lastly, the aspect of the letter
dated 24.08.2021. After narrating these events, what has been
stated by the Review Committee is thus:
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"In the aforesaid circumstances and after perusal of
documents on record, bank's Review Committee on Wilful
Defaulters in its meeting held on 29.12.2021 confirmed the
decision of the Committee of Executives on Wilful
Defaulters."
17. It is difficult to fathom as to what was the decision taken by
the Committee of Executives and what has been confirmed by the
Review Committee. More particularly, neither the order was
provided to the petitioners nor placed before this Court for its
perusal and for determination. When, the respondent bank is taking
such a harsh decision of declaring a person a wilful defaulter, it is
expected of the respondent bank to have followed the bare
minimum requirements of the principles of natural justice. Mere
issuing the communication, narrating the excerpts of the minutes of
the meeting, can hardly be said to be the action on the part of the
respondent bank, reasonable.
18. Therefore, on the over all consideration so also the applicable
law, the action of the respondent bank in declaring the petitioners
as wilful defaulters, was not in tune with the Master Circular on
Wilful Defaulters as well as the principles laid down by the Apex
Court in the judgment in the case of State Bank of India v. Jah
Developers Private Limited & Others (supra). On this count alone,
the captioned writ petition deserves to be allowed and the
communications dated 24.08.2021 and 25.01.2022 deserve to be
quashed and set aside and are hereby quashed and set aside. The
matter is remitted to the Identification Committee at the stage
where the infraction has crept in. It is directed that the Identification
Committee as well as the Review Committee, shall complete the
exercise within a period of three months from the date of receipt of
copy of this order. Needless to say that the said exercise has to be
in sync with the above referred principles and not citing merely the
minutes.
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19. All through out, the conduct of the respondent bank, exhibits
adamant attitude. Even during the course of the arguments, when
the Court, has required the learned counsel for the respondent bank
to place on record the decision, it was informed that apropos the
order dated 26.09.2023, further affidavit, has already been filed
about the aspect of the meeting which has been convened on
14.07.2021, and "This is what it is". Such was not expected from the
bank. Despite not acting in accordance with law and taking a rigid
stand has not augur well with this Court. Therefore, for the reasons
recorded hereinabove, petition deserves to be allowed by imposing
a cost of Rs.10,000/- to be paid to the Gujarat State Legal Services
Authority within 15 days from the date of receipt of the copy of this
order.
(SANGEETA K. VISHEN,J)
RAVI P. PATEL
