2020 (2) TMI 1616 - HC - Insolvency and Bankruptcy

Appellate Court Grants Time for Representation in Wilful Defaulter Case

Union Bank of India & Ors. Versus Sudhir Kumar Patodia & Anr.

The appellate court set aside the judgment, allowing the appeal and granting time for the writ petitioners to submit a representation to the ... Principles of natural justice - power vested in him by law while initiating proceedings to classify the borrowers/directors of the company as wilful defaulters or not - allegation of initiation of proceedings with preconceived mind - improper constitution of the identification committee - HELD THAT:- It is undoubtedly true that although a Writ Court would be slow in entertaining a challenge to a show-cause notice, a challenge can indeed be entertained if objection is taken on the ground of lack of authority or jurisdiction of the officer/authority issuing such notice. In the event, the Court arrives at a conclusion that the officer issuing the show-cause notice lacks authority or jurisdiction to issue it, it goes without saying that the notice has to be quashed with the competent officer/authority being left free to issue notice afresh in accordance with law. Having regard to the scheme enshrined in the master circular as well as the object and purpose which is sought to be achieved by enforcement of the provisions thereof, in our considered view, the omission of the appellant no.2 to refer to the decision taken by the committee neither invalidates the show-cause notice nor is it bad only because the master circular does not expressly provide for delegation of power to issue the show-cause notice to any other officer of the bank - there can be no doubt that the master circular has been introduced to check siphoning of public funds by borrowers who, in the opinion of the lender bank, despite having resources to discharge their debt, neglect or omit to do so with a view to defraud the lender. While it is true that declaring a borrower as a wilful defaulter may result in evil/civil consequences, there are adequate safeguards provided in the master circular which are conceived in the interest of the borrower. However, in the instant case, the power has been exercised by the identification committee to prima facie identify the company as a wilful defaulter and such committee also retained the power to consider the objection that might be raised by the company and/or its directors as to why it/they should not be declared as wilful defaulters, prior to a final order being made in this behalf in accordance with the master circular by the review committee. What the identification committee has delegated to the regional office of the appellant no.1 is the issuance of the show-cause notice indicating the grounds on which the identification committee, prima facie, is of the view that there has been an occasion of wilful default on the part of the company and/or its directors - the regional office proceeding to issue the show-cause notice, even in the absence of express power of delegation, is insufficient to invalidate the proceedings that have been initiated under the master circular to declare the borrower and others, responsible for discharging the debt of the appellant no.1, as wilful defaulters. The show-cause notice appears to have been issued by the appellant no.2 pursuant to the decision of the identification committee taken in its meeting dated 29th June, 2017. Thus, there are no reason to hold that the show-cause notice suffers from a lack of jurisdiction rendering it vulnerable - Once it has been brought to the notice of the borrower that a proceeding has been initiated to declare him as a wilful defaulter on the ground mentioned in the show-cause notice, it becomes imperative for the borrower to dispel the prima facie conclusion that the identification committee might have reached and to urge that the proceedings be dropped. It is for this reason that we have refrained from examining the other contentions of Mr. Banerjee that there has been no consideration of the relevant documents which would justify even a prima facie conclusion that the writ petitioners had wilfully defaulted in repaying their debts and, therefore, created a situation where the appellant no.1 could declare them as wilful defaulters. Appeal allowed. Issues Involved:1. Jurisdiction of the appellant no.2 to issue the show-cause notice.2. Procedural adherence to the Master Circular on Wilful Defaulters issued by the Reserve Bank of India.3. Delegation of power by the Identification Committee to issue the show-cause notice.4. Prejudice suffered by the writ petitioners due to the issuance of the show-cause notice.5. Validity and sufficiency of the show-cause notice issued by the appellant no.2.Issue-wise Detailed Analysis:1. Jurisdiction of the appellant no.2 to issue the show-cause notice:The primary question for decision was whether the show-cause notice dated 15th July, 2017, issued by the appellant no.2, suffered from a lack of jurisdiction. The court found that the notice was issued based on the Identification Committee's decision taken in its meeting on 29th June, 2017. Therefore, it was not a case where the appellant no.2 issued the notice on his own. The court concluded that the omission of the appellant no.2 to refer to the committee's decision did not invalidate the show-cause notice.2. Procedural adherence to the Master Circular on Wilful Defaulters issued by the Reserve Bank of India:The writ petitioners contended that the notices were issued in clear contravention of the Master Circular's provisions. The learned Judge initially found that the Identification Committee's failure to issue the show-cause notice itself vitiated the proceedings. However, the appellate court disagreed, stating that the Master Circular's scheme and the purpose it sought to achieve did not require the Identification Committee to issue the notice directly.3. Delegation of power by the Identification Committee to issue the show-cause notice:The court examined whether the Identification Committee could delegate the issuance of the show-cause notice to the regional office. It referred to the Supreme Court's decision in Prodyat Kumar Bose vs. The Chief Justice of Calcutta High Court, which distinguished between the ultimate power and ancillary powers. The court concluded that the Identification Committee's delegation of the issuance of the show-cause notice to the regional office did not invalidate the proceedings, as the ultimate responsibility for declaring a wilful defaulter remained with the committee.4. Prejudice suffered by the writ petitioners due to the issuance of the show-cause notice:The court noted that apart from alleging that the appellant no.2 had arrogated jurisdiction in contravention of the Master Circular, there was no pleading on how the writ petitioners were prejudiced by the issuance of the show-cause notice. It emphasized that a strong case of abuse of process of law must be established to challenge a show-cause notice, as mere assertion is insufficient.5. Validity and sufficiency of the show-cause notice issued by the appellant no.2:The court held that the show-cause notice was valid and sufficient, as it was issued based on the Identification Committee's decision. The notice informed the company of the grounds for the proposed declaration as a wilful defaulter and provided an opportunity to make submissions. The court found that the procedural safeguards in the Master Circular were adequate and that the notice met the requirements of natural justice.Conclusion:The appellate court set aside the impugned judgment and order, allowing the appeal. It granted the writ petitioners time to submit a comprehensive representation/objection to the Identification Committee, which would then proceed according to the Master Circular. The court emphasized that the primary and ultimate powers of the Identification Committee were not delegated, and the issuance of the show-cause notice by the regional office did not constitute a procedural flaw.