TMI Blog2022 (6) TMI 136X X X X Extracts X X X X X X X X Extracts X X X X ..... those are reasonable restrictions are issues that are therefore kept open for consideration, in an appropriate case. In the decision in STATE BANK OF INDIA VERSUS M/S. JAH DEVELOPERS PVT. LTD. ORS. [ 2019 (5) TMI 862 - SUPREME COURT] , while considering the question as to whether a person is entitled to have a right to be represented by an Advocate before the Committees, it was held that the COE and the Review Committee are only in-house Committees which are purely administrative in nature, not vested with any judicial powers - the Supreme Court also reveals that the decision of the COE ought to be given to the borrower, as soon as it is made and thereafter an opportunity is to be given to the borrower to represent against the said decision, based on which the Review Committee must pass a reasoned order. The order of the Review Committee must also be given to the borrower. Apart from the above, a perusal of the Master Circular reveals that the COE must consider the explanation submitted by the borrower and give reasons for recording the fact of wilful default. With the aforesaid salient features of the Master Circular, when this Court appreciate the contentions raised by t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rties for availing the said credit facility and thus became the guarantors to the credit facility availed by the 1st petitioner. 3. According to the petitioners, cashew industries in the State of Kerala are facing severe crisis and the 1st petitioner also fell into dire straits due to which it defaulted in repayment of the loan. The floods that inundated the State in the year 2018 also contributed to the default, resulting finally in the account of the 1st petitioner being declared as non-performing. Steps were therefore initiated by the bank under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, the SARFAESI Act'). 4. In the meantime, taking note of the precarious situation of the once thriving cashew industry, the Government initiated steps to explore the possibility of reviving the said industry and appointed a Committee. While the Committee appointed by the Government was considering the measures to revive the cashew industry, the 4th respondent issued a notice to the petitioners requiring them to show cause reasons as to why they should not be declared as wilful defaulters. Five instances were specif ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... initiate proceedings to declare the petitioners as wilful defaulters and thereafter issued a show cause notice dated 21.12.2018. 7. The counter affidavit of the fourth respondent also pleaded that, on the basis of the representation of the 5th petitioner that they were in the process of reviving the unit, the COE took a lenient view and decided to keep the matter in abeyance till 30.09.2019. However, after the said date, since it was informed that petitioners had failed to settle the accounts as promised and instead, requested for more additional working capital, the COE decided to declare all the petitioners-the principal borrower and the guarantors, as wilful defaulters by its decision of 11.10.2019 which was communicated to the petitioners as per Ext.P19 dated 18.10.2019. The 4th respondent further pleaded that the meeting of the Review Committee was held on 27.12.2019 and taking note of the failure of the petitioners to make any representation against the decision of the COE, the Review Committee decided to declare the petitioners as wilful defaulters. According to the 4th respondent, petitioners were declared as wilful defaulters by scrupulously following the guidelines iss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ful defaulters for cautioning banks and financial institutions to ensure that further bank finance is not made available to them. The term wilful defaulter is defined in the master circular as occurrences, if any, of the following events : a. The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations. b. The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. c. The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. d. The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank/ lender. 12. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he wilful defaulter. e) Promoter/ Director of wilful defaulter shall not be inducted by another borrowing company. f) As per S.29A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot be a resolution applicant. 14. The Master Circular also specifies in clause 2.1 that the identification of wilful default should be made taking note of the track record of the borrower and should not be decided on the basis of isolated transactions or incidents. The Master Circular further stipulates that the default to be categorised as wilful must be intentional, deliberate and calculated. 15. Thus, on a perusal of the aforesaid clauses in the Master Circular, it can be understood that the impact of declaring a person as a wilful default is drastic and may even have a tendency to impact the fundamental rights of a citizen. Though the learned counsel for petitioners questioned the validity of the Master Circular conferring power upon the banks to declare a person as wilful defaulter, since such a pleading is absent, this Court refrains from considering the said contention. Whether the Reserve Bank of India is vested with powers to confer the banks with authority to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ctor 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 01.07.2015. (emphasis supplied) 17. A glance at the above observations of the Supreme Court reveals that the decision of the COE ought to be given to the borrower, as soon as it is made and thereafter an opportunity is to be given to the borrower to represent against the said decision, based on which the Review Committee must pass a reasoned order. The order of the Review Committee must also be given to the borrower. Apart from the above, a perusal of the Master Circular reveals that the COE must consider the expl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... faulters since the Master Circular as directed by the Supreme Court contemplates declaration as wilful defaulter only after serving the copy of the order of COE and the consequent decision of the Review Committee. The procedure adopted by the 4th respondent while declaring the petitioners as wilful defaulters has thus failed to grant an opportunity to represent on law and on facts against the decision of the COE. Without giving or serving to the petitioners the order of the COE, petitioners cannot be expected to represent against the said decision. Communicating the content or conclusion of the COE to the borrower through an officer of the Bank is not a sufficient compliance of the requirement of giving the order-to the borrower . Ext.R4(d) order itself ought to have been given to the borrower. In such circumstances, this Court is of the considered view that the process by which petitioners have been declared as wilful defaulters is perverse and contrary to the Master Circular of the Reserve Bank of India apart from conflicting with the peremptory directions of the Supreme Court in State Bank of India v. M/s.Jah Developers Pvt. Ltd. and Ors. [AIR 2019 SC 2854]. 21. . Even o ..... X X X X Extracts X X X X X X X X Extracts X X X X
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