2019 (4) TMI 394 - HC - Companies Law

Court upholds 'wilful defaulter' status under RBI Circular; emphasizes lender-borrower relationship.

The court upheld the respondents' decision to declare the petitioners as 'wilful defaulters' under the RBI Master Circular. The court found the ... Wilful defaulter - Petitioners default in meeting its repayment obligation to the respondent no1./bank - Opportunity of personal hearing through advocate - HELD THAT:- Bank paid the amount to the foreign exporters for the purchase of machinery by the petitioner. The petitioner is legally bound to repay this amount to the Bank therefore, even if, the loan amount or the fund was not directly disbursed in the petitioner’s current account but it was directly paid to the exporters on behalf of the petitioner by the respondent – Bank. Hence, the relationship of lenders and borrower has been established between petitioners and respondent No.1/bank . Since, the petitioners have defaulted in meeting its repayment obligation to the respondent no1./bank even when it has a capacity to pay therefore, rightly invited findings in respect of wilful default. The company was having the equity share of ₹ 103.43 Crores, and out of which withdrew the ₹ 54.22 Crores equity share without honouring its commitments under the letters of credit opened by to respondent No.1/bank . Therefore, under 2.1.3(c) the petitioners have rightly been categorized as ‘wilful defaulter’. Opportunity of personal hearing through advocate is concerned a coordinate Bench of this court in the case of Surender (2018 (6) TMI 1587 - MADHYA PRADESH HIGH COURT) has already held that the borrower is not having right to be represented through lawyer/advocate under the master circular. As per clause 3.(b) the personal hearing is available only to borrower Director and Promoter of the alleged default unit. The identification committee is neither a court nor a tribunal. Therefore, I have no reason to take a different view as taken by the coordinate bench of this court in the case of Surender (supra). Even otherwise, the similar issue is also pending before the Div. So far the opportunity of hearing by review committee is concerned, same is not provided in clause 3 of master circular. The mechanism is provided for identification of ‘wilful defaulter’ by the identification committee. The order passed by committee is liable to be reviewed by another committee headed by superior officer named as review committee. Therefore, the RBI has decided to provide double check system by two levels of authorities before declaring any unit as ‘wilful defaulter’. Since the review committee has affirmed the stand taken by identification committee therefore, opportunity of hearing is not required. It is not like remedy of appeal to the default unit. If the identification committee does not pass any order declaring the borrower as ‘wilful defaulter’ then, review committee did not be setup to review such type of decision. It means the role of review committee is only to cross-check the decision of identification committee before declaring borrower as ‘wilful defaulter’ otherwise, a right would have been given to Bank also to apply for review before the review committee in case, identification committee does not pass an order declaring the borrower as ‘wilful defaulter’. Hence, this contention raised by the petitioners is also not having any substance. Hence same is liable to be rejected. By impugned communication dt.23.10.2018, the name of the petitioner has been forwarded to CIC.So far the offer of One Time Settlement is concerned, the Bank has already initiated the proceeding for recovery before DRT, Jabalpur. If the petitioners are really serious for settlement dispute with the respondents – Bank then they may submit an offer before the DRT in a pending proceeding for which no direction is required from this court. The petition is accordingly, dismissed. Issues Involved:1. Declaration of 'wilful defaulter' under RBI Master Circular.2. Validity of non-fund-based credit facilities as a loan.3. Right to representation through an advocate or chartered accountant.4. Mechanism and procedural fairness of the Identification and Review Committees.5. Opportunity for One Time Settlement (OTS).Detailed Analysis:1. Declaration of 'wilful defaulter' under RBI Master Circular:The petitioners were declared 'wilful defaulters' under the RBI Master Circular by the respondents. The petitioners argued that they did not borrow any loan but availed non-fund-based credit facilities, specifically Foreign Letters of Credit, which did not involve disbursement of funds into their accounts. The court referred to the Supreme Court's interpretation in Kotak Mahindra Bank Ltd V/s. Hindustan National Glass and Industries Ltd, which clarified that wilful default includes defaults in meeting payment obligations to the bank under facilities such as bank guarantees and derivative transactions. Therefore, the court concluded that the petitioners' default in repayment obligations under the Foreign Letters of Credit constituted wilful default.2. Validity of non-fund-based credit facilities as a loan:The petitioners contended that since the funds were not directly disbursed to them, there could be no default. However, the court held that payment to foreign exporters on behalf of the petitioners established a lender-borrower relationship. The petitioners' failure to repay the amount paid by the bank to the exporters constituted a default, fulfilling the criteria of wilful default under clause 2.1.3(c) of the Master Circular.3. Right to representation through an advocate or chartered accountant:The petitioners sought representation through an advocate or chartered accountant during personal hearings before the Identification Committee. The court cited a coordinate bench decision in Surender Singh V/s. Bank of Baroda, which held that the Master Circular does not grant the right to be represented by a lawyer/advocate. Clause 3(b) of the Master Circular provides personal hearing only to the borrower, director, and promoter of the defaulting unit. The court upheld this interpretation, denying the petitioners' request for representation through legal professionals.4. Mechanism and procedural fairness of the Identification and Review Committees:The petitioners argued that they were not provided proper personal hearings and that the Review Committee did not pass a reasoned order. The court noted that the Identification Committee's role is to identify wilful defaulters, and the Review Committee's role is to confirm or reject the Identification Committee's decision. The Review Committee's affirmation does not require independent reasoning unless reversing the Identification Committee's decision. The court found the procedural mechanism fair and in line with the Master Circular's provisions.5. Opportunity for One Time Settlement (OTS):The petitioners had offered a One Time Settlement (OTS) to the bank, which was under consideration. The court noted that the bank had already initiated recovery proceedings before the Debt Recovery Tribunal (DRT), Jabalpur. The petitioners were advised to pursue the OTS offer within the pending DRT proceedings, with no further direction required from the court.Conclusion:The court dismissed the petition, upholding the respondents' decision to declare the petitioners as 'wilful defaulters' under the RBI Master Circular. The court found the petitioners' arguments devoid of merit, emphasizing the established lender-borrower relationship, the procedural fairness of the Identification and Review Committees, and the denial of representation through legal professionals as per the Master Circular. The petitioners were advised to pursue the OTS offer within the DRT proceedings. No order as to costs was made.