Sanjay Gupta vs Reserve Bank Of India And Anr
2022 Latest Caselaw 16052 P&H

CWP-25401-2022                                       1

121           IN THE HIGH COURT OF PUNJAB & HARYANA
                         AT CHANDIGARH
                                                CWP-25401-2022
                                      Date of decision: 07.12.2022

SANJAY GUPTA                                                ... Petitioner
                                    Versus

RESERVE BANK OF INDIA AND ANR.                              ... Respondents

CORAM: HON'BLE MR. JUSTICE M.S. RAMACHANDRA RAO,
       HON'BLE MRS. JUSTICE SUKHVINDER KAUR.

Present:      Ms. Kriti S. Avasthi, Advocate and
              Mr. Puneet Gupta, Advocate for the petitioner.

M.S. RAMACHANDRA RAO, J. (ORAL)

Notice of motion.

Mr. Gaurav Goel, Advocate accepts notice on behalf of

respondents No.2 & 3.

This Writ Petition is filed challenging order dt.27.3.2019

passed by respondent No. 1-Bank, declaring the petitioner as 'Wilful

Defaulter' being Director/Corporate Guarantor of the borrower company

M/s Supreme Tex Mart Limited.

It is not in dispute that a show cause notice was issued to the

petitioner and others vide Annexure R7 dt.10.8.2018 proposing to declare

the petitioner as Wilful Defaulter, and asking the petitioner to show cause

within 15 days, why the first respondent Bank cannot treat the petitioner as

Wilful Defaulter, but the reason for proposing to classify the petitioner as

Wilful Defaulter i.e. diversion of funds for other purposes is just mentioned

in the said show cause notice without giving specific instances of such

diversions.

The first respondent Bank again on 15.9.2018 vide Annexure

R-9 reiterated its stand that the petitioner and others had diverted the funds

for other purposes without giving any specific instances of such activity, 1 of 5

and thereafter the Empowerment Committee chaired by the Executive

Director of the respondent Bank took a decision to declare the borrower as

well as the petitioner and others as Wilful Defaulter, and this was approved

by even the review committee on 27.3.2019, without giving any reasons.

Learned counsel for the petitioner contends that even as per the

terms of the Master Circular dt.1.7.2015, in particular paragraph 3, it was

incumbent on the Empowered Committee to consider evidence of "wilful

default", to issue a show cause notice to the borrower, and to the

Director/Guarantor, and then pass an order recording the fact of 'wilful

default' by giving reasons; that an opportunity should be given to the

borrower, and to the promoters/all time Director for a personal hearing if the

committee feels such an opportunity is necessary; and the order of the

Empowered Committee should be reviewed by a Review Committee as

well.

He contends that this Master Circular was challenged by the

State Bank of India before the Hon'ble Supreme Court in Civil Appeal No.

4776 of 2019 in the case of "State Bank of India Versus M/s. Jah

Developers Pvt. Ltd. & Ors." 2019(6)SCC 787, and the Hon'ble Supreme

Court observed as under :-

"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

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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, w e 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 S ection 29A o f 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

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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."

Thus the Supreme Court has noticed the serious consequences

which would befall a borrower and guarantors if there is non compliance

with principles of natural justice, and it has, therefore, insisted that not only

is the borrower/guarantor to be given copy of the order passed by the

Empowered Committee, but the borrower/guarantor should be given an

opportunity to represent against such order within 15 days to the Review

Committee, and directed the Review Committee to pass a reasoned order,

and then serve it on the borrower.

Though this judgment was rendered subsequent to the order

passed on 27.3.2019 by the first respondent Bank, the principle laid down

therein about compliance with natural justice before classifying a

borrower/guarantor as Wilful Defaulter actually flows from the Master

Circular dt.1.7.2013 itself, and it cannot be lost sight of, and has to be

applied with full force to the instant case as well.

Though counsel for the respondents contends that the

procedure as mandated by the Master Circular of RBI dt.1.7.2015 has been

followed by the respondents, we do not agree with the said contention since

the show cause notice did not mention the specific instances of diversion of

funds, and no evidence is considered and reason assigned by the

Empowered Committee and Review Committee.

In our view there is a violation of principles of natural justice.

In this view of the matter, the show cause notice Annexure R6

dt.10.8.2018 issued to the petitioner (without giving instances of diversion

of funds), and the decision of the Wilful Defaulter Empowered Committee

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classifying the petitioner as Wilful Defaulter, as well as the order

dt.27.3.2019 of the Wilful Defaulter Review Committee confirming the

order passed by the Wilful Defaulter Empowered Committee, are all set

aside.

The respondent No. 1 is directed to issue a show cause notice to

petitioner specifically indicating the material on the basis of which a prima

facie conclusion of diversion of funds was drawn against the petitioner;

petitioner is given opportunity to reply thereto within four weeks of the

receipt of the same; then a reasoned order shall be passed by the Wilful

Defaulter Empowered Committee, which shall be communicated to the

petitioner; if the petitioner is aggrieved by the said order of the Wilful

Defaulter Empowered Committee, within 15 days of receipt of the same, he

shall file application before the Wilful Defaulter Review Committee on both

questions of fact and law, and the said committee shall dispose of the same

in accordance with law, and communicate its decision to the petitioner.

The Writ Petition is disposed of accordingly.

                                      (M.S. RAMACHANDRA RAO)
                                               JUDGE



                                              (SUKHVINDER KAUR)
07.12.2022                                          JUDGE
Sonia
             Whether speaking/reasoned              :      Yes/No
             Whether reportable                     :      Yes/No




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