2017 (7) TMI 1279 - HC - Indian Laws

Bank's Jurisdiction Over Defaulters Questioned Due to Procedural Errors

The Court held that the Bank lacked jurisdiction to declare the petitioners as wilful defaulters due to non-compliance with the Reserve Bank of India ... Jurisdiction - writing issued by Manager dated April 13, 2017 issued by Standard Chartered Bank - power of Manager to - declaration of the petitioners as a wilful defaulter - proceeding under section 19 of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 pending - Held that:- Rule 3 of the Master Circular of Reserve Bank of India on wilful defaulter prescribes a mechanism for the purpose of identification of the wilful defaulter. It contemplates two committees. The first committee is to work in terms of Rules 3(a) and 3(b), where the committee is required to issue a notice to the wilful defaulter to show cause and to consider such reply, if any. The second committee deals with an appeal preferred against the order of the first committee. In the present case, nothing has been placed on record to suggest that, the committee contemplated under Rule 3(b) of the Master Circular of the Reserve Bank of India had issued a show cause notice. Consequently the decision of the proper committee as referred to in the impugned order dated April 13, 2017 has no basis. A Bank carrying on banking business in India cannot ignore the Master Circular of the Reserve Bank of India in the context of its banking business. The bank, in the present case, not having complied Rule 3(b) of the Master Circular on Wilful Defaulters, the impugned notice dated April 13, 2017 suffers from material irregularity. The impugned writing dated April 13, 2017 is set aside - petition disposed off. Issues: Jurisdiction of a bank to declare a borrower as a wilful defaulter under the Reserve Bank of India Master Circular on Wilful Defaulters.Analysis:The petitioners challenged a writing issued by Standard Chartered Bank, alleging it was without jurisdiction. The petitioners argued that the Bank did not follow the mechanism for identifying wilful defaulters as prescribed in the Reserve Bank of India Master Circular. They contended that the Manager who issued the letter was not empowered to undertake such identification. The Bank, on the other hand, claimed that a proper committee had reviewed the accounts of the petitioners and found them liable for classification as wilful defaulters. The Court observed that the Bank's decision to include the petitioners in the wilful defaulters list lacked a basis as the required show cause notice under Rule 3(b) of the Master Circular was not issued by the committee. The Court emphasized that a bank operating in India must comply with the Master Circular and held that the impugned notice suffered from material irregularity due to non-compliance with Rule 3(b).The Court noted that the Reserve Bank of India's Master Circular on Wilful Defaulters outlines a specific mechanism for identifying wilful defaulters, involving two committees. The first committee is responsible for issuing a show cause notice and considering replies, while the second committee handles appeals against the first committee's orders. Since there was no evidence of the committee issuing a show cause notice as required by Rule 3(b), the Court concluded that the Bank's decision lacked a valid basis. The Court highlighted that the Bank cannot disregard the Master Circular in its banking operations and ruled that the impugned notice was set aside due to material irregularity arising from non-compliance with Rule 3(b).In conclusion, the Court set aside the writing dated April 13, 2017, but clarified that this decision did not prevent the Bank from invoking the Master Circular to declare the petitioners as wilful defaulters if done in accordance with the prescribed mechanism. The writ petition was disposed of with no order as to costs.