Karnataka High Court

M/S Ssjv Projects Private Limited vs M/S Allahabad Bank on 30 July, 2024

Author: M.G.S. Kamal

Bench: M.G.S. Kamal

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                                                         WP No. 13423 of 2019




                    IN THE HIGH COURT OF KARNATAKA AT BENGALURU

                          DATED THIS THE 30TH DAY OF JULY, 2024

                                          BEFORE

                          THE HON'BLE MR JUSTICE M.G.S. KAMAL

                       WRIT PETITION NO. 13423 OF 2019 (GM-RES)

               BETWEEN:

               1.   M/s. SSJV PROJECTS PRIVATE LIMITED
                    TERRACE FLOOR, VAINETEYA
                    NO.64, 1ST MAIN, S.T.BED,
                    KORAMANGALA 4TH BLOCK,
                    BENGALURU - 560 034
                    REPRESENTED BY ITS DIRECTOR.

               2.   MR. MANOHAR SHETTY
                    S/O LATE NARAYANA SHETTY,
                    DIRECTOR, M/s.SSJV PROJECTS PRIVATE LIMITED
                    AGED ABOUT 58 YEARS,
                    TERRACE FLOOR, VAINETEYA
                    NO.64, 1ST MAIN, ST BED,
                    KORAMANGALA, 4TH BLOCK,
                    BENGALURU - 560 034.

               3.   MR. SOMASHEKHAR SALIMATH
Digitally           S/O M.V.SALIMATH
signed by
SUMA B N            AGED ABOUT 58 YEARS,
Location:           3 AC, 978, KALYAN NAGAR
High Court          HRBR, 1ST BLOCK, BANASWADI
of Karnataka        BENGALURU - 560 043.

               4.   SUDHIR BALAKRISHNA SHETTY
                    AGED ABOUT 53 YEARS,
                    A-1, SHEFFIELD APARTMENT,
                    OPPOSITE SCS HOSPITAL BENDOORWELL
                    MANGALORE - 575 001.

                                                                 ...PETITIONERS
               (BY SRI. SHREYAS JAYASIMHA, ADVOCATE)
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                                              NC: 2024:KHC:30129
                                            WP No. 13423 of 2019




AND:

    M/s.ALLAHABAD BANK
    INDUSTRIAL FINANCE BRANCH- N 603,
    NO.47, MANIPAL CENTRE,
    DICKENSON ROAD, BENGALURU - 560 042
    REPRESENTED BY ITS AUTHORISED REPRESENTATIVE
    HAVING ITS HEAD OFFICE AT 2, NETAJI SUBASH ROAD,
    KOLKATTA - 700 001.

                                                    ...RESPONDENT
(BY SRI. H R KATTI, ADVOCATE FOR C/R)

      THIS WRIT PETITION IS FILED UNDER ARTICLES 226 AND
227 OF THE CONSTITUTION OF INDIA PRAYING TO QUASH AND SET
ASIDE     THE     IMPUGNED      NOTICE    DATED:07.03.2019
[ANNEXURE-A]

      THIS PETITION, COMING ON FOR PRELIMINARY HEARING IN
'B' GROUP THIS DAY, ORDER WAS MADE THEREIN AS UNDER:

CORAM:      HON'BLE MR JUSTICE M.G.S. KAMAL


                         ORAL ORDER

Petitioners are before this Court seeking quash of notice

dated 07.03.2019 produced at Annexure-A issued by the

representative of the respondent-bank by which the petitioner

has been informed about approval/confirmation of the order of

Wilful Defaulter Identification Committee by the Wilful Defaulter

Review Committee of the Board declaring petitioners and its

directors as wilful defaulters as per RBI

Guidelines.

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2. Case of the petitioners is that they had availed

financial assistance against certain financial securities. That

the petitioners had executed necessary documents and

agreements in favour of the respondent-bank while availing the

said financial assistance. That in the year 2005 the said

financial facilities were restructured and fresh documents were

executed. The enhanced financial assistance was renewed from

time to time. It is alleged despite the petitioner servicing the

financial facilities availed from the respondent, respondent-

bank with an intention of tarnishing and maligning the image of

the petitioner had erroneously categorized the account of the

petitioner No.1 as Non-Performing Asset effective from

30.09.2010. That a demand notice dated 14.08.2012 was

issued under Section 13(2) of the Securitization and

Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002. The original application under Section 19 of

the Recovery of Debts due to Banks and Financial Institutions

Act was filed by respondent-bank. A writ petition in

W.P.No.39832-833/2012 was filed by the petitioner aggrieved

by the issuance of demand notice which was quashed by this

Court. Petitioners were again constrained to approach this

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Court by filing W.P.Nos.13932-33/2015 and this Court had

granted an interim protection against the actions contemplated

by the respondent-bank. That when things stood thus on

07.04.2016 a show cause notice was issued by the respondent

to the petitioners proposing to declare the petitioner No.1 as a

wilful defaulter. On receipt of the same petitioners had

submitted a detailed response dated 25.04.2016 explaining the

facts and circumstances and also the reasons why the

petitioner No.1 should not be declared as a wilful defaulter. It

was also contended that a one time settlement offer was also

made by the petitioners. That a notice dated 06.06.2016 was

issued by the respondent-bank rejecting the representation

made by the petitioners and called upon the petitioners to

appear in the proceedings to classify and declare the petitioners

as wilful defaulters.

3. In response to which petitioner No.2 appeared on

23.06.2016 wherein he had again proposed for one time

settlement. The said proposal was followed by a written

representation to consider the one time settlement which was

also rejected by the respondent bank. Petitioners thereafter

filed yet another writ petition in W.P.Nos.43725-27/2016

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seeking quash of show cause notice dated 07.04.2016 and

subsequent notice dated 01.08.2016. Said writ petition was

disposed of permitting the petitioners to file supplementary

objections to the notice dated 01.08.2016 and directed the

respondent to consider the same within four weeks after giving

the petitioners an opportunity of being heard. Petitioners in

furtherance thereof had submitted supplementary objections on

06.12.2018. Thereafter respondent had filed an application on

29.12.2018 in W.P.No.43725-27/2016 seeking extension of

time for consideration of supplementary objections. Said

request of the respondent was considered. That on 18.01.2019

petitioners were provided an opportunity of personal hearing

before the Wilful Defaulter Identification Committee and all

information that was sought for by the respondent authority

was furnished by the petitioners in the said proceedings.

4. That without considering the explanation and

supplementary objections submitted by the petitioners, the

Wilful Defaulter Committee had passed an order declaring

petitioner No.1 and its directors as willful defaulters and the

matter was placed before the willful defaulter Review

Committee for its approval. The approval accorded by the said

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Committee was intimated to the petitioner by the impugned

notice dated 07.03.2019. Aggrieved by the same, the

petitioners are before this Court.

5. Learned counsel appearing for the petitioners

reiterating the grounds urged in the memorandum of petition

submitted that on receipt of the show cause notice

dated:07.04.2016 as well as subsequent notice dated

01.08.2016 the petitioners had submitted detailed response as

per Annexure-F and Annexure-M dated 25.04.2016 and

09.08.2016 respectively. It is submitted that without

considering or adverting to the contentions raised by the

petitioners, the Wilful Defaulter Committee has mechanically

passed the order dated 27.02.2019 which is purportedly

approved by the Wilful Defaulter Review Committee.

6. Learned counsel for the petitioners submit that the

orders passed by the Wilful Defaulter Identification Committee

and Review Committee as above without adverting to the

response submitted by the petitioners is illegal, unjustifiable

and contrary to the established principles of natural justice.

Learned counsel relies upon the following Judgments of the

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Apex Court and High Court of Andhra Pradesh and of this Court

in support of his submissions:

1. STATE BANK OF INDIA AND OTHERS VS. RAJESH AGARWAL AND OTHER REPORTED IN SCC ONLINE SC 342

2. RAJESH AGARWAL VS. RESERVE BANK OF INDIA REPORTED IN AIR 2021 TS 50

3 NAVODAYA EDUCATION TRUST & ORS VS. UNION OF INDIA reported in W.A. NO.836-840/2018 (T-

IT), DATED :05.02.2019

4 GORKHA SECURITY SERVICE VS. GOVERNMENT (NCT OF DELHI) AND OTHERS reported in AIR (2014) 9 SCC 105.

5. MR. S.N. SINHA VS. STATE OF KARNATAKA BY THE SECRETARY DEPARTMENT OF REVENUE AND OTHERS reported in ILR 2012 KAR 448.

6. STATE BANK OF INDIA VS. JAH DEVELOPERS (P) LTD. AND OTHERS, reported in (2019) 6 SCC

787.

7. THE CHAIRMAN, BOARD OF MINING EXAMINATION AND CHIEF INSPECTOR OF MINES AND OTHERS VS. RMAJEE reported in (1977) 2 SCC 256.

8. KANCHAN MOTORS AND OTHERS VS. BANK OF INDIA AND OTHERS reported in [2018 SCC ONLINE BOM 1761].

9. DINESH BAHADUR SINGH AND OTHERS VS.

BANK OF MAHARASHTRA reported in 2021 SCC ONLINE DEL 513.

10. MR. RAJESH AGARWAL V. RBI reported in 2019 SCC ONLINE TS 2545.

11. M/S WOOLCOMBERS OF INDIA LTD., VS.

WOOLCOMBERS WORKERS UNION AND ANOTHER reported in AIR [(1973) SCC (L & S) 551.

12. M/S MAHABIR PRASAD SANTOSH KUMAR VS.

STATE OF U.P., (1970)1 SCC 764.

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13. M/S KRANTI ASSOCIATES PVT., LTD., AND ANOTHER VS. MASOOD AHMED KHAN AND OTHERS reported in (2010) 9 SCC 496.

Hence seeks for allowing of the petition.

7. In response, learned counsel for the respondent-bank

drawing attention of this Court to the annexure purportedly

enclosed to the impugned notice at Annexure-A submits that

the notice at Annexure-A has to be read in conjunction with the

proceedings of the Wilful Defaulter Identification Committee to

arrive at a comprehensive conclusion. It is his submission that

personal hearing opportunity has been admittedly given to the

petitioners and the same cannot be a repeated affair for mere

asking of the petitioners. He refers to the circular of the RBI

produced along with the memo dated 27.06.2021 which is also

produced by the petitioners. Referring to guideline No.3 of the

said circular under the heading "Mechanism for identification of

Wilful defaulters", the counsel for respondent-bank submits

that said guidelines have been strictly adhered to by the

Identification Committee as well as Review Committee. He also

submits that the minutes of the Committee as well as Review

Committee has been enclosed along with the statement of

objections along with Forensic Audit Report and balance sheet.

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Thus he submits that the order passed by the Identification

Committee approved by Review Committee is based on

material which was made available by the petitioners

themselves. As such no fault can be found with the same.

Hence seeks for dismissal of the petition.

8. Heard and perused the records.

9. At the outset it is necessary to note that the order

declaring the petitioner No.1 and its directors as wilful

defaulters is based on purported Forensic Audit Report for the

period between April 2007 to March 2011 which has never been

made available to the petitioner either prior to or during the

said proceedings. That the said report is only filed for the first

time before this Court by the respondent-bank along with the

statement of objections. Thus, there is a clear violation of the

principles of natural justice is the allegation.

10. On a query by this Court, learned counsel for

respondent-bank though fairly submits the forensic audit report

which forms the basis for the order passed by the Wilful

Defaulter Identification Committee has not been furnished to

the petitioners, he hasten to add that there is no need to

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furnish such a document which is an internal and confidential

document. He submits that if the petitioners are aggrieved

they can challenge the finding of the same. The said

submission of the learned counsel for respondent does not

stand for any logic. The entire basis of the order passed by

Wilful Defaulter Committee is the said Forensic Audit report,

the very purpose of the directions being issued by this Court

repeatedly of personal hearing and sufficient opportunity to the

petitioner becomes redundant. It is one thing to contend that

personal hearing was given but not the documents than to say

the petitioner is not entitled as a matter of right the documents

and materials relied upon by the committee in arriving at its

conclusion.

11. Thus, the proceedings of the Wilful Defaulter

Identification Committee which is stated to have been held on

04.02.2019 is enclosed along with impugned notice which

according to the counsel for respondent is the basis for the

order declaring the petitioner and its directors as wilful

defaulters. As pointed out by the learned counsel for

petitioners, perusal of the proceedings of the Wilful Defaulter

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Identification Committee would not indicate application of their

mind to the explanation offered by the petitioners.

12. On the face of it the procedure, method and manner

adopted by the Committee declaring the petitioner as wilful

defaulter, firstly relying upon the Forensic Audit report

admittedly without even furnishing them a copy and secondly

without considering/adverting to the explanation offered as per

Annexure-F and Annexure-M dated 25.04.2016 and 01.08.2016

respectively are grounds enough to interfere with the order

passed declaring the petitioners as wilful defaulters. Petition

therefore succeeds.

13. The Apex Court in the case of State Bank of India

Vs Rajesh Agarwal in Civil Appeal No.7300/2022 at

paragraphs 71, 82, 87 has held as under:

71. Audi alteram partem, therefore, entails that an entity against whom evidence is collected must: (i) be provided an opportunity to explain the evidence against it; (ii) be informed of the proposed action, and (iii) be allowed to represent why the proposed action should not be taken. Hence, the mere participation of the borrower during the course of the preparation of a forensic audit report would not fulfil the requirements of natural justice. The decision to classify an account as fraud involves due application of mind to the facts and law by the lender banks. The lender banks, either individually or through a JLF, have to decide whether a

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borrower has breached the terms and conditions of a loan agreement, and based upon such determination the lender banks can seek appropriate remedies. Therefore, principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the account is classified as fraud under the Master Directions on Frauds.

D.4 Challenge to constitutional validity

82. In Kesar Enterprises Ltd v. State of Uttar Pradesh, the Court dealt with a challenge to the validity of Rule 633(7) of the Uttar Pradesh Excise Manual which allowed the imposition of a penalty for breach of the conditions of a bond without expressly issuing a show-cause notice. D K Jain, J speaking on behalf of the two-judge bench held that a show-cause notice should be issued and an opportunity of being heard should be afforded before an order under Rule 633(7) is made. The Court held that the rule would be open to challenge for being violative of Article 14 of the Constitution unless the requirement of an opportunity to show cause is read into it. The Court observed:

30. Having considered the issue, framed in para 16, on the touchstone of the aforenoted legal principles in regard to the applicability of the principles of natural justice, we are of the opinion that keeping in view the nature, scope and consequences of direction under sub-rule (7) of Rule 633 of the Excise Manual, the principles of natural justice demand that a show-cause notice should be issued and an opportunity of hearing should be afforded to the person concerned before an order under the said Rule is made, notwithstanding the fact that the said Rule does not contain any express provision for the affected party being given an opportunity of being heard.

[...]

32. In our view, therefore, if the requirement of an opportunity to show cause is not read into the said

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Rule, an action thereunder would be open to challenge as violative of Article 14 of the Constitution of India on the ground that the power conferred on the competent authority under the provision is arbitrary.

E. Conclusion

87. The conclusions are summarized below:

i. No opportunity of being heard is required before an FIR is lodged and registered;

ii. Classification of an account as fraud not only results in reporting the crime to investigating agencies, but also has other penal and civil consequences against the borrowers; iii. Debarring the borrowers from accessing institutional finance under Clause 8.12.1 of the Master Directions on Frauds results in serious civil consequences for the borrower;

iv. Such a debarment under Clause 8.12.1 of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted; v. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the time frame contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud; vi. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/ JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order; and

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vii. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness."

14. The said principles have been followed in all the cases

wherever the application of principles of natural justice is

warranted. Non compliance of the principles of natural justice

even as enunciated by the Apex Court is glaring in the instant

case, that to on a admitted fact of not furnishing the material

document based on which the impugned order was passed.

Affording opportunity cannot be an empty formality it has to be

substantial to meet the requirement of the principles of natural

justice. This Court is convinced that since the purported

Forensic Audit Report admittedly not having been furnished to

the petitioner which forms the basis/core of the audit report is

clearly violation of principles of natural justice.

15. Accordingly following: