M/S Pangea Fabrics India Private ... vs Union Of India
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Telangana High Court

M/S Pangea Fabrics India Private ... vs Union Of India on 20 June, 2024

     THE HONOURABLE SRI JUSTICE C.V. BHASKAR REDDY


     WRIT PETITION Nos.5030, 5039, 5109 and 5140 of 2023

COMMON ORDER:

This batch of cases are filed by the petitioners, claiming as Ex-

Directors, who stood as guarantors of M/s.SuryaJyoti Spinning Mills

Limited (for short "SJSML"), assailing the validity of the issuance of

show cause notices declaring them as willful defaulters as per the

Circular No.2015-16/100/DBR No.CID.BC.22/20.16.003/2015-16

dated 01.07.2015 issued by the Reserve Bank of India (RBI) and

consequently prayed this Court to set aside the proceedings dated

19.03.2021 of the Willful Defaulters Identification Committee

(hereafter referred as 'WDIC') and for other reliefs.

2. As the issue involved in all these Writ Petitions is common,

W.P.No.5039 of 2023 is taken up as leading case to decide the lis in

these cases.

3. W.P.No.5039 of 2023 is filed by the petitioner, under Article

226 of the Constitution of India, seeking following relief:

"...to issue appropriate Writ, order or direction more particularly one in the nature of Writ of Mandamus declaring the impugned proceedings of the Willful Defaulters Identification Committee dated 19.03.2021 communicated through Lr.No.SAMB/SEC/LRS dated 16.04.2021 and

impugned Lr.No.SBI/SAMB/SRK/YSK/2022-23/443 dated 15.11.2022 conveying that Review Committee in its meeting dated 26.04.2022 forwarded the name of the Petitioner to Credit Information Committee and impugned Lr.No.SBI/SAMB/SRK/YSK/2022-23/508 dated 26.12.2022 conveying that Bank is proceeding to publish the name of the Petitioner and photographs of the Petitioner in the newspapers is illegal, arbitrary, contra to the guidelines issued in RBI Circular 2015- 16/100/DBR.No.CID.BC.22/20.16.003/2015-16 dated 01.07.2015 and against the law laid down by the Hon'ble Supreme Court in the case of State Bank of India Vs M/s Jaw Developers Private Limited and others in Civil Appeal No.4776/2019 reported in 2019 6 SCC 787, in violation of Article 19 (1) (g) of the Constitution of India and against the Principles of Natural Justice and consequently set aside the impugned proceedings of the Willful Defaulters Identification Committee dated 19.03.2021 communicated through Lr.No.SAMB/SEC/LRS dated 16.04.2021 and the impugned Lr.No.SBI/SAMB/SRK/YSK/2022-23/443 dated 15.11.2022 and impugned Lr.No.SBI/SAMB/SRK/YSK/2022-23/508 dated 26.12.2022.."

4. The case of the petitioner is that he is the Director and

Personal Guarantor of M/s.SJSML, a public limited company,

incorporated under the provisions of Companies Act, 1956 on

23.05.1983 and having its registered office at Burgal village,

Farooqnagar Mandal, Mahabubnagar District. The said company,

which is dealing with manufacture of wearing apparel, has availed

the loan of Rs.280 Crores as credit facility with the consortium

banks i.e, State Bank of India (SBI), Industrial Development Bank of

India (IDBI) and Indian Overseas Bank (IOB) and the respondent

No.2-SBI is the lead bank. According to the petitioner, the said

company has remitted an amount of Rs.151 Crores and Rs.191

Crores as Principal and Interest respectively, with the Consortium

Banks. It is stated that beyond the reasons under the control of the

management and marketing conditions throughout the Country in

Spinning Industry, the company could not discharge its financial

commitments in terms of the agreements entered with the

Consortium Banks which led to classify the loan accounts of SJSML

as Non-Performing Assets (for short 'NPA') w.e.f. 30.03.2013. It is

stated that to get over the financial stress, SJSML submitted

proposal for restructure of the loan accounts under CDR mechanism

and after verifying the viability proposal, the consortium banks

restructured the loan w.e.f. 31.03.2013. It is further stated that even

after extending said benefit, the company could not achieve the

desired results under CDR package to clear the financial

commitments within the Time Schedule. It is the case of the

petitioner that without taking the aforesaid facts into consideration,

issued show cause notice and without providing reasonable

opportunity declared the petitioner as willful defaulter through the

impugned proceedings.

5. The respondent No.2 has filed counter affidavit, inter alia

stating that M/s. SJSML had availed various credit facilities from

time to time and deliberately failed to repay the borrowed amounts

as per terms and conditions and company is liable to pay an amount

of Rs.718,24,43,139.20 as on 31.03.2023 including interest thereon

and it is the duty of the banks to recover the said amount and the

writ petitioner is the corporate guarantor for the credit facility availed

by M/s. SJSML. To recover the due amounts, proceedings have been

initiated before the Debt Recovery Tribunal and National Company

Law Tribunal (NCLT). On verification of the balance sheet, it is found

that the company diverted the funds for the sale proceeds through

loan accounts and it is observed that Rs.365.27 crores in 2014-15

and Rs.330.02 crores in 2015-16 were routed through Cash Credit

facilities with WDIC lenders against the sales revenue of Rs.418.53

crores and Rs.368.87 crores respectively, for the same period. In

Financial Year 2016-17 the sales revenue is Rs.126.20 crores,

whereas the amounts routed through bank accounts were only

Rs.10.85 crores and the remaining amount was diverted without

discharging the loan liability. It is further case of the respondent

No.2 that since the petitioner has diverted the funds contrary to the

terms and conditions, the respondent No.2 by following the Circulars

issued by the RBI, issued show cause notice to the petitioner strictly

adhering to the principles of natural justice. It is also case of the

respondent No.2 that soon after receiving the show cause notice

dated 20.06.2018, the petitioner has submitted reply on 16.07.2018

and after affording personal hearing to the petitioner on various

dates by WDIC, the petitioner was declared as willful defaulter

inconformity with the Guidelines issued by the RBI. Therefore, there

is no illegality or legal infirmity warranting interference by this Court

under Article 226 of the Constitution of India and ultimately prayed

this Court to dismiss the writ petition.

6. The submissions of Sri Avinash Desai, learned Senior Counsel

appearing for the petitioners in brief are that the show cause notice

dated 20.06.2018 was issued by the Deputy General Manager of the

respondent No.2-bank and he is not competent to initiate

proceedings as per the Master Circular issued by the RBI. Therefore,

the issuance of show cause notice itself is bad in law and amounts to

non-application of mind. It is further argued that as per the Master

Circular issued by RBI, the WDIC which is headed by the Executive

Director and consisting of two GMs/DGMs as decided by the Board

of the concerned bank/Financial Institution, is the competent

authority to consider the relevant factors before declaring as willful

defaulter. It is contended that neither in the show cause notice nor

in the impugned proceedings, the signatures of the members of the

WDIC are found and in the absence of the same, the Deputy General

Manager of SBI is not competent to issue the impugned show cause

notice on behalf of WDIC or communicate the same calling for

explanation from the petitioner. The learned Senior Counsel further

contended that the Show cause notice does not contain any reasons

or material, for declaring the petitioner as willful defaulter. It is

further contended by the learned Senior Counsel that the

respondents issued show cause notice on 20.06.2018 and petitioner

has submitted explanation on 16.07.2018 and without passing any

orders, they have issued another show cause notice dated

16.02.2021 on the very same set of allegations granting 30 days

time. It is submitted that a notice dated 02.03.2021, was issued to

the petitioner to appear personally on 19.03.2021 and without

waiting for the petitioner to appear, the WDIC has issued impugned

proceedings dated 19.03.2021 declaring the petitioner as willful

defaulter. It is contended by the learned Senior Counsel that the

Review Committee in its meeting held on 26.04.2022 has

mechanically forwarded the name of the petitioner to Credit

Information Committee to include in the Wilful Defaulter's list and

the Assistant General Manager & CLO of respondent No.2

erroneously issued notice dated 26.12.2022 to the petitioner

conveying that the bank is proceeding to publish the name of the

petitioner in newspaper as wilful defaulter. The aforesaid action on

the part of the respondents amounts to non-application of mind and

gross violation of principles of natural justice. Therefore, the learned

Senior Counsel prays this Court to set aside the impugned show

cause notices dated 20.06.2018 and 16.02.2021 and consequential

proceedings dated 19.03.2021 and letters dated 15.11.2022 and

26.12.2022. In support of his submissions, the learned Senior

Counsel has relied upon the following decisions:

i) Atlantic Projects Ltd. vs. The Allahabad Bank and others 1

ii) Milind Patel vs. Union Bank of India 2

iii) Shantanu Prakash and others vs. Union of India and others 3

iv) Kanchan Motors and others vs. Bank of India and others 4

v) State Bank of India vs. Jah Developers Private Limited 5

7. Per contra, Mr. Vedula Srinivas, learned Senior Counsel

appearing for the respondents has submitted that the first show

cause notice was issued on 20.06.2018 and the petitioner has

submitted explanation dated 16.07.2018 and pending finalization of

the said proceedings, on the request of the petitioner, a notice was

issued to the petitioner intimating the date of personal hearing to be

conducted on 19.03.2021. After hearing the petitioner, the impugned

proceedings have been issued on 19.03.2021 intimating the

petitioner to make a representation to the Review Committee within

15 days from the date of receipt of the WDIC report and the

petitioner having failed to make a representation within the time

specified in the said notice, has no right to question the decision

(2019) 3 CALLT 491 (HC) = MANU/WB/1115/2019

MANU/MH/1507/2024 = 2024 (3) ABR 295

2021 (DHC) 1591 = MANU/DE/0904/2021

MANU/MH/2154/2018

(2019) 6 SCC 787

taken by the Review Committee confirming the proceedings issued by

the WDIC. In support of his submissions, learned Senior Counsel

placed reliance on the decision in State of Uttar Pradesh v. Sudhir

Kumar Singh and others 6 and ultimately prayed for dismissal of

the writ petitions.

8. Considered the submissions of respective counsel for both

sides and perused the record.

9. The petitioner is an Ex-Director and personal guarantor of

M/s.SuryaJyoti Spinning Mills Limited ('SJSML'), which was

incorporated under the provisions of Companies Act, 1956, and

involves in manufacture of wearing apparel. According to the

petitioner, the said company availed loan of Rs.280 Crores as credit

facility. The said company has remitted certain amounts towards the

principal and interest, in terms of the agreement entered with the

respondent bank. The said company has failed to keep up its

promise in remitting amounts regularly and having been no option,

the loans of the said company were classified as Non-Performing

Assets (NPA) w.e.f. 30.03.2013. The proposal of the company for

restructure of the loan was accepted by the respondents under CDR

package and the same was not utilized in remitting the amounts

regularly. A show cause notice was issued by the Deputy General

AIR 2020 Supreme Court 5215

Manager of SBI to the petitioner on 20.06.2018 stating that the

petitioner's account has been classified as NPA and the Willful

Defaulter Identification Committee of the Bank (hereinafter referred

as 'WDIC'), has concluded that the acts and events of the petitioner

amounts to willful default and called for explanation as to why the

name of the petitioner should not be included in the defaulter list as

per RBI Guidelines and allowed time of 30 days to submit

explanation. The petitioner has submitted explanation dated

16.07.2018 inter alia stating that the default committed is not

deliberate or intentional and the same is for the reason of losses

suffered continuously and there was no diversion of funds for other

purposes and the loan amount was strictly utilized as per the terms

and conditions and their application for OTS is pending and

requested to drop the action sought to be initiated. After receipt of

the explanation, the respondents instead of passing orders in terms

of the Circulars issued by the RBI, on the same set of allegations,

issued another show cause notice dated 16.02.2021, calling for

explanation from the petitioner within 30 days. The grievance of the

petitioner is that the respondents without waiting till the period

mentioned in the show cause notice is completed, have issued

another notice dated 02.03.2021 to the petitioner to appear

personally on 19.03.2021 at 11:00 AM and on the very same day,

they have issued impugned proceedings, declaring the petitioner as

willful defaulter.

10. Before deciding the question whether the petitioner is liable to

be declared as willful defaulter or not, it is apt to refer to the Master

Circular Guidelines issued by the RBI regarding willful defaulters in

Circular No.RBI/2013-14/63 DBOD No.CID.BC.3/ 20.16.003/2013-

14 dated 01.07.2013. The Guideline No.3 of the said Circular reads

as follows:

"3. Grievances Redressal Mechanism

Banks/F.Is should take the following measures in identifying and reporting instances of willful default:

(1) With a view to imparting more objectivity in identifying cases of willful default, decisions to classify the borrower as willful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two GMs/DGMs as decided by the Board of the concerned bank/FI.

(ii) The decision taken on classification of willful defaulters should be well documented and supported by requisite evidence. The decision should clearly spell out the reasons for which the borrower has been declared as willful defaulter vis-à-vis RBI guidelines.

(iii) The borrower should thereafter be suitably advised about the proposal to classify him as willful defaulter along with the reasons therefor. The concerned borrower should be provided reasonable time (say 15 days) for making representation against such decision, if he so desires, to a Grievance Redressal Committee headed by the Chairman and Managing Director and consisting of two other senior officials.

(iv) Further, the above Grievance Redressal Committee should also give a hearing to the borrower if he represents that he has been wrongly classified as willful defaulter.

(v) A final declaration as 'wilful defaulter' should be made after a view is taken by the Committee on the representation and the borrower should be suitably advised.

11. Clause 3 of the above circular specifically states that to classify

the borrower as willful defaulter, a committee has to be constituted

with the higher functionaries headed by Executive Director and

consisting with 2 GMs/DGMs and the decision taken to classify the

borrower as willful defaulter must be on relevant material with

reasoned order and borrower should be given 15 days time for

making representation against the decision taken by the committee

to Grievance Redressal Committee headed by Chairman and

Managing Director and the Grievance Redressal Committee should

give a hearing to the borrower, if he disputes the said classification.

The procedure emanated in the above circular is in consonance with

the principles of natural justice and the rule of audi alteram partem.

Admittedly in the instant case, show cause notice to the petitioner

was issued on 20.06.2018 and the petitioner has submitted his

explanation on 16.07.2018. Even after receiving the same, the

respondents have not passed any orders by following the Circulars

issued by the RBI. For the reasons best known to the respondents,

they have issued another show cause notice dated 16.02.2021 to the

petitioner on the very same set of allegations and granted 30 days

time to the petitioner to submit explanation. Both the show cause

notices dated 20.06.2018 and 16.02.2021 were issued by the Deputy

General Manager of the SBI and they do not contain the signature of

the competent authority constituted under Clause 3 of the Master

Circular dated 01.07.2013 issued by RBI. The notice dated

02.03.2021 issued by the respondents provides an opportunity of

personal hearing to the petitioner on 19.03.2021 at 11:00AM.

According to the petitioner, on the very same day i.e, on 19.03.2021,

the respondents have issued impugned proceedings classifying him

as willful defaulter without adverting to the reasons mentioned in the

explanation submitted by him. The Review Committee without going

into the same and treating that the petitioner has not made any

representation has confirmed the proceedings issued by the WDIC.

The procedure adopted by the respondents in issuing the show cause

notice and passing the impugned proceedings declaring the

petitioner as willful defaulter, is not in consonance with the Master

Circulars issued by the RBI. The said circular was interpreted by the

High Court of Calcutta in Atlantic Projects Limited's case (supra),

wherein in Para 29, it was observed as follows:

"29. All administrative functions cannot be delegated. Where law requires an identified administrative authority to decide on a particular issue or subject, such administrative authority cannot delegate its power to decide. The Master Circular on willful Defaulters dated July 1, 2015 prescribes and identifies the decision making authorities. It also prescribes the issues required to be decided by the identified decision making authorities. Issuance of the show-cause notice is an integral part of the decision making process in the issue prescribed to be decided by the stipulated decision making authority. In the scheme of the decision making process as prescribed under the subject Master Circular, in my view, the function of issuance of show-cause notice cannot be delegated. Treating the decision that, the Identification Committee takes in terms of Clause 3(b) of the Master Circular on willful Defaulters dated July 1, 2015, to be an administrative order, then also, certain functions of the Identification Committee cannot be delegated such as, its considerations of the materials placed by the bank at the initial stage, the considerations of the submissions by the Identification Committee, and

the taking of the decision and recording the reasons for arriving at such decision that an event of willful default has occurred. It also cannot delegate its function of taking a decision as to whether, the delinquent borrower is required to be given a personal hearing or not before passing the final order on the event of willful default. In my understanding, the words used in Clause 3(b) of the Master Circular on willful Default dated July 1, 2015 are such that, they do not allow the Identification Committee to delegate any of their functions to any other authority. If the functions noted above cannot be delegated, in my view, the requirement of issuance of the show-cause notice cannot also be delegated. That requirement, must be discharged by the Identification Committee. Preparation of the minutes of its decision on the materials first placed before the Identification Committee in terms of the first portion of Clause 3(b) of the Master Circular on willful Defaulters dated July 1, 2015 will not permit the Identification Committee to delegate its functions of issuance of the show-cause notice based upon such minutes or its conclusion that, an event of willful default has occurred on the strength of the materials placed by the bank before it. Clause 3(b) requires application of mind by the Identification Committee at all stages. It is required to apply its mind on the contents of the show-cause notice also as it is a crucial stage in the whole process. The delinquent must have the entirety of the materials that were placed before the Identification Committee for the delinquent to give a meaningful submission. Right of oral hearing is not automatic as the words of Clause 3(b) stands. Therefore, it is imperative that the Identification Committee applies its mind to the contents of the show-cause notice so that the delinquent is not deprived of a meaningful opportunity to defend itself."

12. The Hon'ble Apex Court in State of Uttar Pradesh v. Sudhir

Kumar Singh's case (supra) observed that while applying the rule of

audi alteram partem (the primary principle of natural justice) the

Court/Tribunal/Authority must always bear in mind the ultimate

and overriding objective underlying the said rule, viz., to ensure a

fair hearing and to ensure that there is no failure of justice. In the

instant case, it is the case of the petitioner that as per the Master

Circular issued by the RBI, show cause notice was not issued by the

competent authority. Further, the respondents issued a notice to the

petitioner affording an opportunity of personal hearing on

19.03.2021 at 11:00AM and in violation of principles of natural

justice, on the very same day, the respondent No.2 in a

predetermined manner issued impugned proceedings. Further, the

Review Committee also without examining the material with regard

to classification of petitioner as wilful defaulter by WDIC, in a

mechanical manner, confirmed the proceedings of the WDIC. The

aforesaid action on the part of respondents amounts to non-

application of mind and the impugned proceedings dated 19.03.2021

and letters dated 15.11.2022 and 26.12.2022 suffers from

procedural irregularities.

13. In Badrinath vs. State of Tamil Nadu and others 7 and

State of Kerala v. Puthenkavu N.S.S. Karayogam & another 8,

the Hon'ble Supreme Court observed that once the basis of a

proceeding is gone, all consequential acts, actions, orders would fall

to the ground automatically and this principle is applicable to

judicial, quasi-judicial and administrative proceedings equally.

14. In Mangal Prasad Tamoli (dead) by Lrs. v. Narvadeshwar

Mishra (dead) by Lrs. And others 9, the Hon'ble Supreme Court held

that if an order at the initial stage is bad in law, then all further

proceedings, consequent thereto, will be non est and have to be

necessarily set aside.

AIR 2000 SC 3243

(2001) 10 SCC 191

(2005) 3 SCC 422

15. In State of Punjab v. Davinder Pal Singh Bhullar and

others 10, the Hon'ble Supreme Court held as follows:

"It is a settled legal proposition that if initial action is not in consonance with law, all subsequent and consequential proceedings would fall through for the reason that illegality strikes at the root of the order. In such a fact-situation, the legal maxim "sublato fundamento cadit opus"

meaning thereby that foundation being removed, structure/work falls, comes into play and applies on all scores in the present case."

16. It may further be noted that the Hon'ble Supreme Court in

catena of judgments has held that the grounds, upon which the

action is to be taken against a person, are required to be mentioned

in the show cause notice. In Commissioner of Customs, Mumbai v.

Toyo Engineering India Ltd. 11, the Hon'ble Supreme Court held

has under:

"16. Learned counsel for the Revenue tried to raise some of the submissions which were not allowed to be raised by the Tribunal before us, as well. We agree with the Tribunal that the Revenue could not be allowed to raise these submissions for the first time in the second appeal before the Tribunal. Neither the adjudicating authority nor the Appellate Authority had denied the facility of the project import to the respondent on any of these grounds. These grounds did not find mention in the show cause notice as well. The Department cannot travel beyond the show- cause notice. Even in the grounds of appeals these points have not been taken.

(2011) 14 SCC 770

(2006) 7 SCC 592

17. In Commissioner of Central Excise, Bhubaneshwar v.

Champdany Industries Ltd. 12, the Hon'ble Supreme Court has held

as under:

"38. Apart from that, the point on Rule 3 which has been argued by the learned counsel for the Revenue was not part of its case in the show- cause notice. It is well settled that unless the foundation of the case is made out in the show-cause notice, the Revenue cannot in Court argue a case not made out in its show cause notice. (See Commr. of Customs v. Toyo Engg. India Ltd. [(2006) 7 SCC 592] ) Similar view was expressed by this Court in CCE v. Ballarpur Industries Ltd. [(2007) 8 SCC 89] In para 27 of the said Report, learned Judges made it clear that if there is no invocation of the Rules concerned in the show-cause notice, it would not be open to the Commissioner to invoke the said Rules."

18. In Commissioner of Central Excise, Chandigarh v. Shital

International 13. Relevant paragraph of the said judgment is

delineated below:

"19. As regards the process of electrifying polish, now pressed into service by the Revenue, it is trite law that unless the foundation of the case is laid in the show-cause notice, the Revenue cannot be permitted to build up a new case against the assessee. (See Commr. of Customs v. Toyo Engg. India Ltd. [(2006) 7 SCC 592] , CCE v. Ballarpur Industries Ltd. [(2007) 8 SCC 89] and CCE v. Champdany Industries Ltd. [(2009) 9 SCC 466] ) Admittedly, in the instant case, no such objection was raised by the adjudicating authority in the show-cause notice dated 22-6-2001 relating to Assessment Years 1988-1989 to 2000-2001. However, in the show-cause notice dated 12-12-2000, the process of electrifying polish finds a brief mention. Therefore, in the light of the settled legal position, the plea of the learned counsel for the Revenue in that behalf cannot be entertained as the Revenue cannot be allowed to raise a fresh plea,

(2009) 9 SCC 466

(2011) 1 SCC 109

which has not been raised in the show cause notice nor can it be allowed to take contradictory stands in relation to the same assessee."

19. The principle that emerges from the above judgments is that a

show cause notice is required to provide details of the nature of

allegations and the grounds on which the show cause notice has

been issued. Further, the authorities cannot travel beyond the scope

of the allegations contained in the show cause notice and pass

orders. In the instant case, both the show cause notices were not

issued by the competent authority following the Circular issued by

the Reserve Bank of India. Having issued a notice to the petitioner

providing an opportunity of personal hearing on 19.03.2021, on the

very same day, the impugned proceedings dated 19.03.2021 has

been issued by WDIC, which reveals that the authorities have not

applied their mind to the facts of the case.

20. Since the challenge in these writ petitions is the procedure

adopted by the respondents in issuing show cause notice and the

consequential proceedings and letters classifying the petitioners as

willful defaulters and approval of the same by the Review Committee,

this Court is of the opinion that the procedure adopted by the

respondents is in violation of rule of audi alteram partem, principles

of natural justice and Master Circulars issued by the Reserve Bank

of India and they are not in accordance with law.

21. Accordingly, these Writ Petitions are allowed and the impugned

show cause notices dated 20.06.2018 and 16.02.2021 and

consequential proceedings dated 19.03.2021 and letters dated

15.11.2022 and 26.12.2022 are set aside and the respondents are

directed to follow the Circulars issued by the Reserve Bank of India

and issue fresh show cause notice to the petitioners within a period

of 15 days from the date of receipt of copy of this order, calling for

explanation with regard to classification of petitioners as willful

defaulters and on receipt of such explanation, the respondents are

directed to pass appropriate orders, in accordance with law, after

affording opportunity of personal hearing to the petitioners.

As a sequel, miscellaneous petitions pending if any, shall

stand closed. No order as to costs.

___________________________ C.V. BHASKAR REDDY, J Date: 20.06.2024 scs