TMI Blog2014 (12) TMI 1251X X X X Extracts X X X X X X X X Extracts X X X X ..... ank. Once a borrower is declared to be a wilful defaulter by a bank, the rigours under the Master Circular would kick in. Non-declaration of wilful defaulter even after an enquiry to such effect under the Master Circular being undertaken by a bank will not bind any other bank with such view as a borrower has to be adjudged as a wilful defaulter in relation to the transactions that the borrower had with the considering bank. Viewed in such context the letter of State Bank of India is of little consequence. In fact, State Bank of India is required to undertake the exercise under the Master Circular also notwithstanding its letter. The letter is not by the Grievance Redressal Committee of State Bank of India. The Master Circular requires the banks and financial institutions to undertake such exercise expeditiously and to report on the same so that a wilful defaulter is dealt with in a manner commensurate with its status. Therefore, every individual banker under the consortium will be entitled to proceed and deal with the writ petitioners under the Master Circular notwithstanding the contents of the letter date January 31, 2012 of the lead banker. The letter dated January 31, 2012 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... defaulter. He submits that, Kingfisher Airlines Limited (KAL) was enjoying credit facilities from a consortium of bankers. United Bank of India is a member of such consortium. State Bank of India is the lead banker of the consortium. KAL faced financial difficulties at a given point of time. Such financial difficulties emanated out of factors external to the management of KAL. He contends that, in the fact of this case, KAL cannot be classified as a wilful defaulter within the meaning of the Master Circular of the Reserve Bank of India. He contends that the term wilful default has been defined in the Master Circular and that neither KAL nor any of the writ petitioners can be classified as a wilful defaulter within the meaning of the Master Circular. In support of such contention he refers to the letter dated January 31, 2012 issued by the lead banker, State Bank of India to the Reserve Bank of India. The lead banker had opined on January 31, 2012 that KAL was making every effort to achieve satisfactory performance of its operations. The lead banker had enumerated various reasons due to which the account of KAL had become irregular. All of such reasons were external to the mana ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was the State Bank of India who did not make over the funds to the bank from out of the Trust Retention Account. The writ petitioners cannot be foisted with the default of State Bank of India in not paying the sum of ₹ 7.5 crores to the United Bank of India. He contends that, there were sufficient funds in the Trust Retention Account with State Bank of India to pay the United Bank of India. With regard to the second charge contained in the letter dated June 28, 2014 as to the operation of bank account of HDFC, he contends that, the lead banker, the State Bank of India had issued a no objection on January 11, 2012 to KAL to operate such HDFC account. In view of such no objection, the charge of wilful default on the ground of operating a bank account outside the consortium, with HDFC, cannot be sustained. Referring to the decision of the Grievance Redressal Committee, Mr. Pal contends that, the decision of the Grievance Redressal Committee was vitiated due to unfairness and breach of the principles of natural justice. He contends that, the prayer for deferment of the hearing made on behalf of the writ petitioners by two several letters of the Advocate of the writ p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Master Circular. Article 21 of the Constitution of India recognizes the right to reputation of a citizen of India. The Master Circular if allowed to stand, will infringe upon such right of a citizen of India. Mr. Pal refers to the subject matter of the first writ petition and submits that, the only issue raised in the first writ petition was the entitlement of the writ petitioners to a representation by lawyers before the Grievance Redressal Committee. The Trial Judge negated such contention. On appeal, the Division Bench concurred with the finding of the Trial Court. He points out that, the Division Bench denied a lawyer s representation on the ground that evidence was not required to be taken before the Grievance Redressal Committee. He contends that, notwithstanding such finding being returned by the Division Bench, the Grievance Redressal Committee of the bank proceeded to take evidence. It was unfair on the part of the Grievance Redressal Committee of the bank to take evidence in view of the decision rendered by the Division Bench. Moreover, since the Grievance Redressal Committee had taken evidence on record, it should have allowed lawyers representation to the wr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e also refers to 1923 All England Law Reports Reprint page 253 (R. v. Sussex Justices), 1969 Volume 2 Supreme Court Cases page 262 (A.K. Kraipak Ors. v. Union of India Ors.), 1984 Volume 4 Supreme Court Cases page 103 (J. Mohapatra and Co. Anr. v. State of Orissa Anr.), 1991 Volume 1 Supreme Court Cases page 494 (Isabella Johnson v. M.A. Susai) and 2001 Volume 1 Supreme Court Cases page 182 (Kumaon Mondal Vikas Nigam Ltd. v. Girja Shankar Pant Ors.) and submits that, the presence of an extra person vitiates the proceedings before the Grievance Redressal Committee. Referring to 1976 Volume 3 Supreme Court Cases page 585 (Dr. G. Sarana v. University of Lucknow Ors.) Mr. Pal contends that, the Grievance Redressal Committee records considering 30 documents by it. Such documents were not made over by the writ petitioners at any point of time. He points out that, even in the affidavit used by the bank in the present writ petition, such documents have not been made over to the writ petitioners. He contends that, the writ petitioners are entitled to copies of the documents which were placed before the Grievance Redressal Committee and which was taken into consideration by su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Master Circular which are absent. The Master Circular does not use the word only while specifying the numbers. There is no negative clause in the Master Circular stating that any breach of such compliance will visit the bank with any penalty. These aspects indicate that the members prescribed are not mandatory. Mr. Mitra contends that, the applicability of the principles of natural justice has to be viewed in the facts of each case. A writ petitioner cannot be allowed the luxury of making unsubstantiated allegations with regard to the breach of the principles of natural justice. He refers to 2010 Volume 13 Supreme Court Cases page 255 (Natwar Singh v. Director of Enforcement Anr.), All India Reporter 1955 Calcutta page 353 (Gopal Chandra v. Bepin Behari) and 1977 Volume 2 Supreme Court Cases page 256 (Chairman, Board of Mining Examination and Chief Inspector of Mines Anr. v. Ramjee) in this regard. On the score that the bank did not provide the 30 documents placed before the Grievance Redressal Committee, he contends that, the same cannot be construed to be a breach of any principle of natural justice. He contends that, any writ petitioner appearing before the G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Ors.) and All India Reporter 1965 Supreme Court page 895 (Raza Buland Sugar Co. Ltd. Rampur v. The Municipal Board, Rampur). Mr. Mitra relies on the Principles of Statutory Interpretation 15th Edition by Justice G.P. Singh page 389 to 405 on the issue that when a statutory provision can be said to be mandatory and when it can be said to be directory in nature. Mr. Mitra distinguishes the authorities cited by Mr. Pal on the point of biasness and submits that, each of the individual cases cited by Mr. Pal would show in the facts of such case that a person interested in the proceedings was a part of the decision making process, therefore, vitiating the entire decision making process. In the instant case, there is no question of the decision making process being vitiated due to biasness as the bank has acted in terms of the guidelines of the Master Circular of the Reserve Bank of India. Mr. Mitra relies on 1988 Calcutta Law Journal page 20 (Smt. Molina Ghosh v. State of West Bengal Ors.) in support of the proposition that, the writ petitioners were entitled to raise all these issues in the first writ petition and not having done so, cannot be allowed to urge the same on th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... airlines business. KAL claims that it was one of the largest domestic airlines in terms of market share at a given point of time. KAL enjoyed credit facilities from diverse banks and financial institutions under a consortium agreement. The respondent no. 2, United Bank of India was one of the members of such consortium. State bank of India was the lead banker of such consortium. KAL suffered financial difficulties. It ultimately went out of the business of airlines. When KAL was facing financial difficulties, State Bank of India as the lead banker undertook a debt restructuring exercise for KAL. A Master Debt Recast Agreement was entered into. One of the conditions of such agreement was that, all transactions of KAL will be routed through a Trust Retention Account to be maintained with the State Bank of India. KAL will not open any new account and have any financial dealings with any bank or financial institution without the expression consent of the consortium or at least the lead banker of the consortium. At a given point of time, KAL faced a threat of suspension by International Air Transport Association. In order to tide over such suspension KAL approached various banks ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 014. In its letter dated June 23, 2014, United Bank of India charged KAL with opening an account with HDFC bank, a non-consortium bank, for cash management of KAL without the consent of the consortium banks. The second charge was failure of KAL to repay United Bank of India the sum of ₹ 7.5 crores in spite of KAL having the capacity to pay such sum. KAL approached the Writ Court challenging this course of action of United Bank of India in W.P. No. 19247(W) of 2014. KAL limited its challenge in the first writ petition to the question whether KAL was entitled to legal representation before the Grievance Redressal Committee or not. The challenge in such writ petition being limited to such question is recorded in paragraph 10 of the judgment and order dated July 10, 2014 disposing of W.P. No. 19247(W) of 2014. The Writ Court negated the right of KAL to have legal representation before the Grievance Redressal Committee. It allowed United Bank of India and its Grievance Redressal Committee to proceed to decide the issue upon service of 72 hours advance notice to KAL and its directors. KAL carried an appeal being A.S.T. No. 320 of 2014. The appeal and the stay application connect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... simultaneously. The Special Leave Petition of KAL was dismissed by the Hon ble Supreme Court of India by an Order dated September 2, 2014 as in the opinion of the Hon ble Supreme Court of India the petition had become infructuous in view of the decision rendered by the Grievance Redressal Committee in the meantime. On the first two issues Mr. S. Pal, learned Senior Advocate after attacking the two Master Circulars not to be pieces of subordinate legislations, ultimately conceded that they were so. According to him, the Master Circulars were issued under the Banking Regulation Act, 1949 and were binding on the banks and financial institutions carrying on banking business in India. According to him, the number of personnel specified in Regulation 3(i) and 3(iii) are mandatory as are the rest of the Circulars. Since the Identification Committee and the Grievance Redressal Committee in the facts of this case were constituted by four personnel, and that number being in excess of the mandatory prescribed number under the Wilful Defaulters Circular, he contends that, the decision making process stands vitiated and, therefore, the ultimate decision should be quashed. Mr. Hirak Mitra, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... In Allied Beverage Co. Pvt. Ltd. (supra) the Supreme Court notes the principles formulated by the Constitution Bench in Ravindra Ors. (supra). In Sardar Associates Ors. (supra) it is held by the Supreme Court that a bank was bound to follow the guidelines issued by Reserve Bank of India. It notes the dicta laid down by the Constitution Bench in Ravindra Ors. (supra) as, 56 ..RBI directives have not only statutory flavour, any contravention thereof or any default in compliance therewith is punishable under sub-section (4) of Section 46 of the Banking Regulation Act, 1949. The Reserve Bank of India itself has clarified by a notification that the Master Circular on Wilful Defaulters was issued under Section 35A of the Banking Regulation Act, 1949. Secondly, in view of such authoritative pronouncements of the Hon ble Supreme Court in the three authorities cited above, the irresistible conclusion is that, the Master Circulars in question are binding on United Bank of India and its constituents. Thirdly, it is agreed at the bar that the Master Circulars being issued under Section 35A of the Banking Regulation Act, 1949 are binding upon the banks and financial institut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not assist a Court to arrive at a conclusion that the numbers prescribed in the Master Circular are directory and not mandatory. Mr. Mitra submits that a bank and financial institution has the liberty to play at the joints in deciding the members prescribed. I would agree with Mr. Mitra to the limited extent on this score. The Reserve Bank of India in Regulation 3(i) of the Master Circular allows a bank or a financial institution to play at the joints when it allows General Managers/Deputy General Managers to constitute the Identification Committees along with the Executive Director. The last of the Master Circulars on Wilful Defaulters of the Reserve Bank of India is dated July 1, 2014. The Master Circular dated July 1, 2014 specifies the purpose of such Master Circulars. The purpose specified is to put in place a system to disseminate credit information pertaining to wilful defaulters for cautioning banks and financial institutions so as to ensure that further banking finance is not made available to wilful defaulters. The Master Circular defines the term wilful default . The terms diversion of funds and siphoning of funds are also defined by the Master Circular. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... required to be reasoned and well documented. This finding of the Identification Committee is then required to be considered by the second tier, namely, the Grievance Redressal Committee after affording the borrower proposed to be declared as a wilful defaulter a reasonable opportunity of hearing by the Grievance Redressal Committee. The bank is also required to make over the decision of the Identification Committee along with all evidence considered by it to the borrower proposed to be declared as a wilful defaulter for such borrower to make a representation on the subject to the Grievance Redressal Committee within the time frame allowed, if he chooses to. Regulation 3(i) of the Master Circular under the heading of Grievances Redressal Mechanism requires a bank and a financial institution to entrust the duty of identifying cases of wilful default and the decision to classify a borrower as wilful defaulter to a committee of higher functionaries headed by the Executive Director and consisting of two General Managers and Deputy General Manager and decided by the Board of the concerned bank or financial institution. The Reserve Bank of India has used the word should in Regulation 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... roper to read the Master Circular to say that, on this aspect the Master Circular is directory. If such an interpretation is allowed, then a bank and a financial institution will have unbridled and unguided power in its hand to constitute the Identification Committee and the Grievance Redressal Committee with such numbers as they may choose. Across the banking sector, there would be different composition of the two committees leading to a situation where a constituent could claim with some amount of justification to be discriminated against by a bank in relation to another bank on the basis of the number of persons constituting the two committees. A borrower can be a constituent of a number of banks and financial institutions at the same time as in the instant case. KAL is a constituent of a number of banks under a consortium agreement. In such an event, the borrowers would also get a footing to claim that the bank must constitute the two committees in a particular manner to suit their convenience. That a borrower gets to have a say in the constitution of the two committees cannot be culled out from the reading of the Regulation 3 of the Master Circular as it stands. Reading the Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The Identification Committee held a meeting on May 22, 2014 to identify constituents as wilful defaulters. It was constituted by four members with one Executive Chairman, a Chief General Manager and two General Managers being present. This is in excess of the number of three personnel prescribed in Regulation 3(i) of the Master Circular on wilful defaulters issued by the Reserve Bank of India. In such circumstances the decision arrived at by such Identification Committee is a nullity. Consequently, all steps taken by United Bank of India subsequent to such so-called identification are also a nullity. Significantly, the Grievance Redressal Committee also constituted by four members. This is also in violation of Regulation 3(iii) of the Master Circular issued by the Reserve Bank of India. The third issue revolves around the letter dated January 31, 2012 of the lead banker of the consortium. The letter dated January 31, 2012 of State Bank of India is a request to the Reserve Bank to relax the restructuring guidelines so as to facilitate the restructuring of the accounts of KAL. This letter dated January 31, 2012 is not a declaration of any of the two committees under the Master Cir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... actions that the borrower had with the considering bank. Viewed in such context the letter of State Bank of India is of little consequence. In fact, State Bank of India is required to undertake the exercise under the Master Circular also notwithstanding its letter. The letter is not by the Grievance Redressal Committee of State Bank of India. The Master Circular requires the banks and financial institutions to undertake such exercise expeditiously and to report on the same so that a wilful defaulter is dealt with in a manner commensurate with its status. Therefore, every individual banker under the consortium will be entitled to proceed and deal with the writ petitioners under the Master Circular notwithstanding the contents of the letter date January 31, 2012 of the lead banker. The letter dated January 31, 2012 will not impede State Bank of India itself to invoke the provisions of the Master Circular. Such letter, therefore, by no stretch of imagination can be held to impede the invocation of the Master Circular by other members of the consortium. In such circumstance the third issued is answered in the affirmative and in favour of United Bank of India. This will not pre ..... X X X X Extracts X X X X X X X X Extracts X X X X
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