TMI Blog2020 (12) TMI 1020X X X X Extracts X X X X X X X X Extracts X X X X ..... itself, such declaration has far-reaching effect, since the concerned persons would not get any loans or other financial benefits and incentives in future due to such declaration. Hence, the respondents argument, as to the irregularity committed by them being minor and without prejudice to the petitioners, does not hold water - Not only did the respondents arrive at conclusive findings in the show-cause notice itself, thereby hinting at a predetermined and closed mind-set, having pre-decided that the petitioners were wilful defaulters even prior to the orders of the two committees, no copy of the Identification Committee order was handed over to the petitioners at all. The flimsy pretext that the said order was a virtual reiteration of the initial order of the committee defies logic since, after such order, a coordinate bench of this court had specifically directed fresh order to be passed, thereby rendering the previous order infructuous. The admission of the respondents that the subsequent order was a mere reiteration of the previous order itself vitiates the sanctity of the latter order for lack of application of independent judicial mind in the second adjudication. The Iden ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ompany Law Tribunal, Kolkata. Petitioner nos. 3, 4, 5 and 7 are erstwhile Independent Directors, petitioner no.6 an erstwhile Executive Director and petitioner nos. 8 to 12 Corporate Guarantors of the company. 2. By a letter dated February 28, 2019, show-cause was issued to the petitioners regarding proposed declaration of the petitioners as wilful defaulters under the RBI Master Circular dated July 1, 2015. The petitioners replied to the show-cause notice on June 6, 2019. By way of a letter dated July 10, 2019, the petitioners were informed that the Committee for Identification of Wilful Defaulters (Identification Committee) had classified the petitioners as wilful defaulters on April 19, 2019 and that such decision had been confirmed by a Review Committee. The petitioners, by a letter dated July 23, 2019, refuted the allegations made by the respondents and requested the latter to withdraw and/or cancel and/or revoke the orders of the Committees. The petitioners thereafter moved a writ petition bearing W.P. No. 392 of 2019 before this court, which was disposed of by a co-ordinate Bench on August 5, 2019, whereby it was held that there were procedural irregularities in the dec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... petitioners were not only deprived of a forum but also of the opportunity of giving a proper representation before either of the committees. 7. It is further submitted that the Review Committee s order was identical with that of the Identification Committee and did not indicate any independent application of mind by the Review Committee. 8. Learned counsel for the petitioners cites an unreported judgment dated May 3, 2019 passed by a co-ordinate Bench of this court in W.P. No. 7471(W) of 2019 [M/s Atlantic Projects Ltd. Ors. Vs. The Allahabad Bank Ors.], for the proposition that Clause 3(b) of the Master Circular, 2015 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. It was held to be 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 defen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... full representation on facts and law (if any). 12. Referring to Clause 3(b) of the RBI Master Circular dated July 1, 2015, it is argued that the Identification Committee shall issue a show-cause notice to the concerned borrower and the promoters/whole-time director and call for their submissions. In the present case, however, apart from the petitioner nos. 1 and 2, none of the other petitioners were promoters/whole-time directors of the company. Moreover, the show-cause notice dated February 28, 2019 and/or the orders of both the Committees did not reveal any allegation against the Corporate Guarantors. Such guarantors, it is argued, have no liability in respect of wilful default but might only be held responsible with regard to repayment of the loan itself, if at all. Paragraph no. 2 of the writ petition indicates clearly that the petitioner nos. 3, 4, 5 and 7 are erstwhile Independent Directors, the petitioner no. 6 an erstwhile Executive Director and petitioner nos. 8 to 12 Corporate Guarantors of the company. 13. On the other hand, learned counsel for the respondents submits that the company itself has not come up with the writ petition or challenged the show-cause notice ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion Committee concludes that an event of wilful default has occurred. Thus, the petitioners arguments as regards the Identification Committee having arrived at a final conclusion before the show-cause notice, is not tenable in the eye of law. The conclusion arrived at by the Committee prior to the show-cause notice was of tentative nature, subject to final orders being passed by the Identification Committee and being confirmed by the Review Committee. 20. Learned counsel for the respondents submits that the findings of the audit report, as quoted in the show-cause notice, correspond to certain findings of the Review Committee order, as evident from page nos-86 to 89 of the Review Committee order. It is evident from the portions of the forensic report, as appearing at page nos-86 to 89, 91, 103 and 104 of the vacating application, that such findings indicate violation of Clauses 2.1, 2.2.1(b) etc., of the Master Circular. 21. It is argued that the Identification Committee maintained its earlier order even after the direction of the co-ordinate Bench of this court and, therefore, no further notice of such order was required to be served on the petitioners. That apart, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is under a corporate insolvency resolution process, making it impossible for the company itself to move the present writ petition. Since notice was issued and orders of wilful default were passed against the petitioners, the petitioners have locus standi to move the present writ petition. 29. Learned counsel for the petitioners argues that, as evident from the forensic report furnished by the respondents for the first time with the vacating application, only a negligible percentage of transactions were off-set out of the loan amount. By placing several findings in the auditor s report itself, learned counsel submits that the same was tentative and not final and was not binding on the petitioners or the company in any respect. The authors of the report specifically observed in the report that it was prepared for a specific purpose on request of the SBI and could not be used for any other purpose. The SBI itself having no qualms with the petitioners or the company, the respondents could not have relied on the same as sacrosanct for taking the ultimate step of declaring the petitioners wilful defaulters. 30. By reading out several observations made at pages-80, 81, 100 and 104 o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e going on in respect of the company-in-question vide order dated February 7, 2020 passed by the National Company Law Tribunal, Kolkata, thus, disabling the company itself from preferring the writ petition. That apart, since the show-cause notice was issued to the petitioners themselves and the petitioners were held to be wilful defaulters, the present challenge at the behest of the petitioners, without impleading the company separately, is valid in law. 37. At the outset it is noted that admittedly, apart from petitioner nos. 1 and 2, none of the petitioners were promoters/whole-time directors of the company. Since the Master Circular is penal in nature, although arguably not stigmatic, the provisions thereof ought to be strictly construed. Moreover, Clause 3(b) of the Master Circular, 2015 operates in a restricted and specific domain and specifies that a show-cause notice is to be issued to the concerned borrower and the promoters/whole-time director before initiating proceedings under the provisions of the Circular against such persons. Hence, the mechanism for identification of wilful defaulters, as stipulated in Clause 3 of the Master Circular, cannot apply at all to person ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Jah Developers (supra), regarding a meaningful representation on fact and law by the delinquents, a myth. The petitioners were not given any opportunity of reply, before the Identification Committee passed an order on the show-cause notice, by withholding copies of the forensic report. Thereafter, the respondents also withheld a copy of the Identification Committee order, which they were bound under Clause 3(b) of the Master Circular to give to the petitioners immediately. The first opportunity of reply given to the petitioners would necessarily be before the Review Committee, thereby depriving the petitioners of the first forum. 41. In any event, the Review Committee merely quoted the report and the findings of the Identification Committee without any independent application of mind being reflected from its order. Thus, the entire process of declaring the petitioners as wilful defaulters was reduced to a farce. 42. The principle laid down in Jah Developers (supra), as elaborated in M/s Atlantic (supra), were utterly violated by the respondents, as were the provisions of Clause 3 of the Master Circular, 2015. 43. Contrary to the arguments of the respondents, the observatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Identification Committee permitted the petitioners to file their reply directly before the Review Committee, which deprived the petitioners of a hearing before the first committee. The scope of consideration by the Review Committee would only arise once the Identification Committee decides the matter of declaration of wilful defaulter upon considering the stand of the alleged delinquent. Without such opportunity, the order of the Identification Committee would be incomplete, being bereft of the delinquents version, leaving no scope for the Review Committee to consider the petitioners defence. 47. The argument, that the Review Committee had no option but to confirm the Identification Committee order in its entirety, is based on faulty logic, since the petitioners had, in fact, specifically asked for a copy of forensic report and other relevant documents, which was denied to them. Thus, it was impossible for the petitioners to put their representation on fact and law before either of the Committees. The petitioners had no opportunity to refute the observations of the forensic report, to show its inherent contradictions and/or point out the irrelevance of the report in the contex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the forensic report created a huge difference, since both the orders were based on the report and the petitioners have been able to point out several portions of the report which were selectively overlooked by the respondent-authorities. Such portions, such as the miniscule percentage of set-off with regard to the loan account, could have been pointed out by the petitioners if given a chance. Moreover, the forensic report is ex facie unreliable for the purpose of identification of wilful defaulters, since the same was of limited purport in the context in which it was prepared and was ex facie tentative and not relevant for any other purpose. In fact, the auditors preparing the report themselves categorically stated in the report itself that the same was not conclusive and cannot be relied on for any other purpose. 53. In such circumstances, the committees acted contrary to logic befitting a prudent person in relying on the same as sacrosanct to hold the petitioners to be wilful defaulters. 54. The entire effort of the Identification Committee and the Review Committee was to somehow label the petitioners as wilful defaulters, in the process violating all norms of natural j ..... X X X X Extracts X X X X X X X X Extracts X X X X
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