2009 (9) TMI 1037 - HC - Indian Laws

Court overturns willful defaulter status, upholds master circular constitutionality.

The court set aside the decision of the grievance redressal committee declaring the petitioner company as a willful defaulter, finding the bank had acted ... - Issues Involved:1. Constitutionality of the Reserve Bank of India (RBI) master circular dated July 1, 2008.2. Jurisdiction of the grievance redressal committee of the bank.3. Alleged violation of principles of natural justice.4. Alleged bias in the decision-making process.5. Applicability of the master circular to the transaction in question.6. Maintainability of the writ petition under Article 226 of the Constitution.7. Availability of an alternative remedy through arbitration under the Credit Information Companies (Regulation) Act, 2005.8. Res judicata and constructive res judicata.Detailed Analysis:Constitutionality of the RBI Master Circular:The petitioners challenged the RBI master circular on the grounds that it was unconstitutional, arguing that it allowed the bank to act as both judge and jury, violating the principle of natural justice. They contended that Clause 3 of the master circular was arbitrary and inherently biased, as it left the decision entirely in the hands of the bank's internal committees. The court, however, upheld the validity of the master circular, noting that it was a policy decision made in public interest to ensure the integrity of the financial system. The court referred to the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, which had similarly been upheld despite its stringent measures.Jurisdiction of the Grievance Redressal Committee:The petitioners argued that the grievance redressal committee of the bank acted without jurisdiction, as the master circular applied only to lender-borrower relationships, which they claimed did not exist between the bank and the petitioner company. The court examined the nature of the transactions and the terms of the agreements between the parties, ultimately finding that the bank had overstepped its jurisdiction in applying the master circular to the petitioner company. Consequently, the decision of the grievance redressal committee was set aside.Alleged Violation of Principles of Natural Justice:The petitioners claimed that the bank violated principles of natural justice by not providing adequate documentation and evidence that led to the initial decision to classify the petitioner as a willful defaulter. The court found that while there were procedural lapses, they did not amount to a violation of natural justice significant enough to invalidate the entire process. The court emphasized substantial compliance with procedural requirements over strict adherence.Alleged Bias in the Decision-Making Process:The petitioners alleged bias due to the presence of a particular individual, Mr. Sathe, on the grievance redressal committee, who had represented the bank in other disputes against the petitioner company. The court noted that the petitioners had not raised this objection during the proceedings before the committee and had effectively waived their right to challenge the composition of the committee. The court held that mere association in other matters did not constitute bias unless there was a clear demonstration of personal animosity or prejudice.Applicability of the Master Circular to the Transaction in Question:The core issue was whether the master circular applied to the derivative transactions between the bank and the petitioner company. The court scrutinized the definitions and provisions of the master circular and related banking laws, ultimately concluding that the master circular did not encompass the type of transactions in question. The court noted that the terms 'borrower' and 'lender' in the master circular implied traditional credit facilities, not derivative transactions.Maintainability of the Writ Petition Under Article 226:The respondents argued that the writ petition was not maintainable as the bank was a private entity and not a 'state' or 'authority' under Article 12 of the Constitution. The court, however, held that the public character of the duty involved in invoking the master circular brought the matter within the ambit of Article 226. The court emphasized that the nature of the grievance and the public interest involved justified judicial review.Availability of an Alternative Remedy Through Arbitration:The respondents contended that the petitioners should seek remedy through arbitration as provided under the Credit Information Companies (Regulation) Act, 2005. The court acknowledged the existence of an alternative remedy but held that it was not efficacious in this case, as the arbitral tribunal would not have the authority to address the challenge to the validity of the master circular. The court found that the fundamental question of jurisdiction warranted judicial review.Res Judicata and Constructive Res Judicata:The respondents argued that the petition was barred by res judicata and constructive res judicata due to a previous petition filed by the petitioners. The court examined the previous order and found that it had left all questions open for the grievance redressal committee to decide. Therefore, the court held that the principle of res judicata did not apply, and the petitioners were not precluded from challenging the validity of the master circular in the current proceedings.Conclusion:The court set aside the decision of the grievance redressal committee dated April 7, 2009, declaring the petitioner company as a willful defaulter. The court found that the bank had acted without jurisdiction in applying the master circular to the transactions in question and that the petitioners' challenge to the validity of the master circular was maintainable. The court did not find any apparent mala fides on the part of the bank and did not award costs.