Gujarat High Court
M/S. Anox Cables Industries vs The Reserve Bank Of India on 30 January, 2024
Author: Sangeeta K. Vishen
Bench: Sangeeta K. Vishen
NEUTRAL CITATION
C/SCA/10914/2023 ORDER DATED: 30/01/2024
undefined
IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
R/SPECIAL CIVIL APPLICATION NO. 10914 of 2023
==========================================================
M/S. ANOX CABLES INDUSTRIES
Versus
THE RESERVE BANK OF INDIA
==========================================================
Appearance:
MR MIT S THAKKAR(11223) for the Petitioner(s) No. 1,2,3
MR BOMI H SETHNA(5864) for the Respondent(s) No. 2
NOTICE SERVED BY DS for the Respondent(s) No. 1
==========================================================
CORAM:HONOURABLE MS. JUSTICE SANGEETA K. VISHEN
Date : 30/01/2024
ORAL ORDER
By the consent of learned advocates appearing for the
respective parties, matter is taken up for final disposal. Respondent
no.1 - Reserve Bank of India, though served, has chosen not to
enter appearance.
2. By this petition, petitioners have prayed for quashing and
setting aside the decision dated 08.12.2022, communicated vide
letter dated 31.01.2023 passed by the Committee of Executives for
Identification of Wilful Defaulter (hereinafter referred to as 'the
Identification Committee') of the respondent no.2 bank, classifying
the petitioners as wilful defaulters as well as order dated 05.06.2023
communicated by the Deputy General Manager, Legal & Recovery
Department, confirming the classification of the petitioners as wilful
defaulters.
3. Mr Mit S. Thakkar, learned advocate for the petitioners, at the
outset, submitted that decision taken in the minutes of meeting
dated 08.12.2022, so also 12.05.2023 by the Review Committee,
NEUTRAL CITATION
C/SCA/10914/2023 ORDER DATED: 30/01/2024
undefined
are not in conformity with the rules of principles of natural justice,
so also the principle laid down by the Apex Court in the case of
State Bank of India vs. Jah Developers reported in (2019) 6 SCC 787.
It is submitted that a show cause notice was issued to the
petitioners dated 19.08.2022, requiring the petitioners to show
cause as to why the petitioners and the firm, should not be
classified as wilful defaulters on the ground indicated therein. It is
submitted that when such a drastic step was proposed to be taken
against the petitioners, it was expected of the respondent no.2 bank
to have provided the documents, on the basis whereof, the
proposed action was initiated by the respondent no.2 bank.
3.1 It is submitted that a bare perusal of the communication dated
31.01.2023, suggests that it does not carry any reasons, except two
grounds to come to the conclusion that the petitioners, have
defaulted in repayment obligations to the bank and have siphoned
off the funds and the funds have not been utilized for the specific
purpose for which it was availed of. It is submitted that another
ground, is the default in repayment obligations to the bank and
siphoning off the funds, so also disposal and removal of the movable
assets given for the purpose of securing term loan. It is submitted
that how, when and on what basis that the petitioners have
defaulted in repayment obligations, is not discernible.
3.2 It is submitted that request was made for hearing; however,
without offering sufficient and fair opportunity, that the decision was
taken. In the proceedings before the Review Committee also,
though it has been stated that time was offered, but the same
cannot be said to be an effective opportunity to the petitioners to
rebut or refute the grounds stated in the order. It is submitted that
NEUTRAL CITATION
C/SCA/10914/2023 ORDER DATED: 30/01/2024
undefined
in the case of State Bank of India vs. Jah Developers (supra), it has
been held and observed that "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". The Apex Court, therefore, has
observed that paragraph 3 of the Master Circular permits the
borrower to make a representation within 15 days of the preliminary
decision of the First Committee. It also states that after following
paragraph 3(b), the copy of the order is to be given to the borrower
as soon as it is made, so that the borrower can represent against
such order within a period of 15 days to the Review Committee.
Written representation, has been envisaged on facts and law, and
the Review Committee, is then required to pass a reasoned order on
such representation which, must then be served on the borrower.
3.3 It is submitted that clearly, both the orders by the
Identification Committee, so also the Review Committee, cannot be
said to be orders, setting out the reasons, on the basis whereof, the
petitioners, have been declared as wilful defaulters. It is therefore,
urged that the orders, deserve to be quashed and set aside only on
this limited ground and the matter be remitted to the Identification
Committee for its decision afresh.
4. On the other hand, Mr Bomi H. Shethna, learned advocate for
the respondent no.2 bank, submitted that it is not that the
opportunity was not given. Various opportunities were given, which
is clear from the communication dated 31.01.2023, so also the
communication dated 05.06.2023; however, it was the petitioners,
NEUTRAL CITATION
C/SCA/10914/2023 ORDER DATED: 30/01/2024
undefined
who did not avail of the opportunity and were only requesting for
time, delaying the hearing before the Identification Committee, so
also the Review Committee.
4.1 It is submitted that the credit facilities, were sanctioned to the
petitioners for purchase of the imported machinery in the name of
petitioner no.1 and to substantiate the said aspect purchase letters
issued in the name of petitioner no.1, were submitted. As a part of
verification process, confirmation was sought from Lubi Industries
LLP, Kirloskar Brothers Ltd. and one another. The information was
received from the respective parties, that they have not issued the
purchase letters. The Kirloskar Brothers Ltd. informed that the
documents submitted by the petitioners are false and requested not
to proceed on the basis of the said documents. It is submitted that
therefore, it was clear that there was siphoning off the funds and it,
were not utilized for the purpose for which it was sanctioned. It is
however, urged that petitioners be remitted to the respondent no.2
bank, and it shall follow the principles laid by the Apex Court in the
case of State Bank of India vs. Jah Developers (supra) and then pass
the orders.
5. Heard learned advocates appearing for the respective parties.
6. The Apex Court, in the case of State Bank of India vs. Jah
Developers (supra), while considering the Master Circular, has in
paragraph 24 held and observed 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
NEUTRAL CITATION
C/SCA/10914/2023 ORDER DATED: 30/01/2024
undefined
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, 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."
It has been 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 also been held
and observed that moment a person is declared to be a wilful
defaulter, the impact on its fundamental right to carry on business is
NEUTRAL CITATION
C/SCA/10914/2023 ORDER DATED: 30/01/2024
undefined
direct and immediate for, no additional facilities can be granted by
any bank/financial institutions, and entrepreneurs/promoters would
be barred from institutional finances for five years. The Apex Court
has considered paragraph 3 of the Master Circular and permitted
the borrower to make a representation within 15 days of the
preliminary decision of the First Committee. The Committee then
upon receipt of the representation, has to pass a reasoned order on
such representation, which reasoned order would mean, reason
available to the Committee to come to a conclusion that the fund
was siphoned off or has not been utilized for which purpose it was
granted and/or siphoning off, so also disposal and removal of the
properties, which has been given as security.
7. Pertinently, decision has been taken by the Identification
Committee and the Review Committee in the respective meetings
convened by it. The decision was taken by the Identification
Committee possibly in its meeting convened on 08.12.2022 and the
reasons and grounds, inter alia, were twofold, namely, (i) that the
petitioners have defaulted in repayment obligations to the banks
and have siphoned off the funds; the funds have not been utilized
for the specific purpose for which finance was availed for, and (ii)
defaulted in repayment obligations to the bank and has siphoned off
the funds, so also disposed of or removed the movable assets given
for the purpose of securing term loan.
8. The said decision of the Identification Committee, was
confirmed by the Review Committee in its meeting convened on
12.05.2023; however, except stating that the order passed by the
Wilful Defaulter Identification Committee, is confirmed, no reasons
are coming forth from the said communication or either from the
NEUTRAL CITATION
C/SCA/10914/2023 ORDER DATED: 30/01/2024
undefined
minutes of meeting of the Review Committee held on 12.05.2023.
Much has been stated by filing the reply; however, when the
respondent no.2 bank was confronted, it is fairly conceded by Mr
Bomi H. Shethna, learned advocate, that the same is not forming
part of the communications dated 31.02.2023, so also 05.06.2023.
9. Thus, such action on the part of respondent bank would not be
in confirmity with principles of natural justice, so also the principles
laid down by the Apex Court in State Bank of India vs. Jah
Developers (supra). Therefore, on this limited ground and also on
the ground that they are not supported by any reasons, both the
communications dated 03.01.2023, so also 05.06.2023, deserve to
be quashed and set aside and are hereby quashed and set aside.
The matter is remitted to the Identification Committee and let the
Committee proceed further from the stage the infraction has crept
in. It is directed that the Identification Committee and the Review
Committee, shall take decision in terms of the judgment of the Apex
Court in the case of State Bank of India vs. Jah Developers (supra)
and pass a reasoned order. The aforesaid exercise shall be
completed within a period of three months from the date of receipt
of copy of this order.
10. Needless to clarify that the rights and contentions of the
respective parties, are left open. This Court, has not expressed any
opinion on merits of the matter.
11. In view of the above, petition, stands partly allowed. No order
as to costs.
(SANGEETA K. VISHEN,J)
BINOY B PILLAI
