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TMI Blog2024 (3) TMI 397X X X X Extracts X X X X X X X X Extracts X X X X ..... icials of the Union Bank of India,. ORAL JUDGEMENT: (PER, SOMASEKHAR SUNDARESAN J.) 1. Rule. By consent, rule is made returnable forthwith, and the writ petition is taken up for final hearing and disposal. Show Cause Notice and Context: 2. This Petition seeks various declaratory reliefs whereby adherence to principles of natural justice, including provision of inspection of relevant material, is sought to be read into the due process stipulated by the Respondent No. 2, the Reserve Bank of India ("RBI"), in connection with declaration of bodies corporate, their promoters and directors, as "wilful defaulters". 3. The Petitioner is a former Joint Managing Director of IL&FS Financial Services Limited ("IFIN"), a wholly-owned subsidiary of Infrastructure Leasing & Financial Services Limited ("ILFS"). The Petitioner has worked with ILFS since June 1993, except for a brief period between February 2003 and August 2005. The Petitioner was eventually designated as a Joint Managing Director of IFIN with effect from 1st April 2014. The Petitioner ceased to be in the services of IFIN with effect from 31st March 2018. The Petitioner's role as a "whole time director" of IFIN is up f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s towards other purposes, or if the borrower siphons out the funds borrowed; b) To declare a person as a wilful defaulter, "the evidence of wilful default" [Paragraph 3(a) of the Master Circular], on the part of the borrower and its wholetime Director "at the relevant time" should be examined by a Committee headed by an Executive Director of the bank along with two other Senior Officers in the rank of General Manager or Deputy General Manager ("Identification Committee"); c) If such Identification Committee concludes that an event of wilful default has occurred, a show cause notice must be issued to the borrower and its relevant whole-time directors and call for an explanation. After considering the submissions in reply, and providing an opportunity of being heard (should the Identification Committee feel such an opportunity is necessary) [Paragraph 3(b) of the Master Circular], a reasoned order recording the wilful default must be issued; and d) The aforesaid reasoned order is not a final order, but it is a draft order that is subjected to review by another Committee headed by the Chairman or the Chairman and Managing Director or the CEO of the bank or financial instituti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e of his responsibilities on IFIN to submit that since March 2014, his role fundamentally changed from overseeing lending business to overseeing equity investments and advisory operations. The Petitioner did not get a response to this request, but on 25th July, 2022, Union Bank issued to the Petitioner a hearing notice giving him an opportunity of being heard, scheduling such hearing for 5th August 2022 by video conferencing. On 31st July, 2022, the Petitioner reiterated his request for the underlying documents, information and other material, in order to effectively deal with the allegations contained in the SCN, without any response. 10. On 5th August, 2022, the Petitioner participated in a personal hearing, and on 15th August, 2022, filed his written submissions pursuant to the personal hearing. In these submissions, the Petitioner yet again requested access to essential documents based on which the SCN came to be issued. The Petitioner also made other submissions to the extent he was able to, with the documents and information available with him. His written submissions ran into 46 pages with various annexures from annual reports and other material in the Petitioner's possessi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... earing before the Review Committee, after being served with draft order of the Identification Committee. There is no response from Union Bank to these requests from the Petitioner. 14. It is against the aforesaid factual backdrop that the Petitioner has filed this writ petition seeking intervention from a constitutional court inter alia by way of a declaration that all documents referred to and relied upon in the SCN ought to be provided, and, seeking the quashing of the final order of the Review Committee. Findings and Analysis: 15. We are not getting into the merits of whether IFIN, and thereby the Petitioner are guilty of committing wilful defaults. What is noteworthy is that the RBI itself had expressed a clear policy view that it was arming banks and financial institutions with serious powers to inflict the drastic civil consequences on borrowers (the RBI terms these as "penal"). Banks are essentially commercial entities without quasi-judicial expertise or experience. Therefore, the RBI took care to stipulate that it would be "imperative" for banks to put in place a "transparent mechanism" so that the "penal" provisions are not mis-used and the scope of "discretionary powe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, 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 Section 29-A of 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 Para 3 of the Master Circular dated 1-7-2013 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 Para 3(b) of the Revised Circular dated 1-7-2015, must give its order to the borrower a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... etitioner (although made to the Identification Committee after the personal hearing) have not even been recorded, much less, been dealt with. Seeking to resist the writ petition, Union Bank has turned on its head, the imperative requirement of having a transparent mechanism as mandated in the Master Circular. The affidavit asserts that the Master Circular does not provide for giving any document to the person who is proposed to be declared as a wilful defaulter. The affidavit-in-reply dated 21st February, 2024 asserts the following :- "9. ...I say the circular dated 1 s t July 2015 does not provide for giving any documents to the person who is proposed to be declared as a willful defaulter. It is for the person who is proposed to be declared as a willful defaulter to submit all the relevant documents to prove his innocence. I say that the present case after issuance of show cause, notice dated 5th July 2022, the Petitioner has submitted his response dated 12th July 2022, 31st July 2022 and 15th August 2022. He was also given opportunity to attend personal hearing which has taken place on 5th August 2022. Thus, the grievance of denial of natural justice is misplaced. 10. .....t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces on any citizen, the noticee should be able to appreciate the case made out against him so that he may deal with the allegations to the best of his ability. The only means of doing so is to provide detailed proper notice of the reasons for having formed a prima facie view when calling upon the noticee to show cause why such prima facie view must not translate into a final view. Such an approach would enable the noticee to understand in a cogent manner the case that he is supposed to meet. Takano - the law on inspection for natural justice: 24. It is now well settled that due compliance with principles of natural justice must essentially entail compliance with the obligation to provide access to the material on which the allegations are based. In the case of T.Takano Vs Securities and Exchange Board of India & Anr. [(2022) 8 SCC 162] (Takano), after considering the law declared on access to the material underlying the allegations, across various types of enforcement proceedings under various legislations, the Hon'ble Supreme Court pithily summarized the relevance of disclosure of information and record in the following words: "C.2. Duty to disclose investigation material ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s does not begin and end at providing a reasoned order. Keeping a party bereft of the information that influenced the decision of an authority undertaking an adjudicatory function also undermines the transparency of the judicial process. It denies the party concerned and the public at large the ability to effectively scrutinise the decisions of the authority since it create an information asymmetry. 29. The purpose of disclosure of information is not merely individualistic, that is to prevent errors in the verdict but is also towards fulfilling the larger institutional purpose of fair trial and transparency. Since the purpose of disclosure of information targets both the outcome (reliability) and the process (fair trial and transparency), it would be insufficient if only the material relied on is disclosed. Such a rule of disclosure, only holds nexus to the outcome and not the process. Therefore, as a default rule, all relevant material must be disclosed. [Emphasis Supplied] 25. A plain reading of Takano would throw light on how the Master Circular must be construed. The Master Circular consciously enables inflicting "penal" consequences, and underlines the "imperative" need ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... without appropriate capacity and training to appreciate requirements of the rule of law. First, the bank has asserted that no material needs to be provided. The bank has also asserted that the onus of proving innocence is on the accused. While IFIN may have been declared a wilful defaulter as a borrower, there is not a whisper of analysis of evidence at the relevant time demonstrating the role of the Petitioner for holding him to be individually responsible. The Petitioner had made submissions about who was in charge of lending activity and that his role was restricted to equity investments. There is nothing in the final order to even suggest show how all this has been considered and dealt with. In these circumstances, it is evident that the final order, a near-verbatim reproduction of the SCN, is not a reasoned order and is a product of non-compliance with the principles of natural justice. 28. In these circumstances, after having heard the submissions of the parties, we put it to the learned counsel for Union Bank to ask his client to consider recalling the orders of the Identification Committee and the Review Committee, with liberty to conduct the proceedings afresh from the st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l institutions that seek to invoke the Master Circular to declare occurrence of wilful default, must identify the members of the Identification Committee and the members of the Review Committee, and share the reasoned orders passed by such committees. In the instant case, the SCN, the hearing notice and the final order are all signed by the same individual, who purports to communicate them, with no clarity on who were the persons who conducted the hearing and who were the persons who passed the orders; (f) Any agency, including Respondent Nos. 3 to 6, that has published or disseminated the name of the Petitioner identifying him as a wilful defaulter on the strength of the orders that now stand withdrawn by Union Bank, shall forthwith remove such identification from publicly accessible information resources. 32. Rule is made absolute in the aforesaid terms and the writ petition is disposed of accordingly. 33. We have persuaded ourselves that there shall be no order as to costs. We trust that the law declared in this judgement would provide guidelines for conduct of proceedings under the Master Circular, which itself is an important instrument of law aimed at dealing with socie ..... X X X X Extracts X X X X X X X X Extracts X X X X
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