Court quashes defaulters' status for non-compliance, grants bank liberty for reconsideration.

The court quashed the communications declaring the petitioners as wilful defaulters due to non-compliance with the RBI Master Circular and principles of natural justice. The bank was granted liberty to reconsider the case following proper procedures. The writ petition was allowed, providing relief to the petitioners from the impugned declarations.

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Issues Involved:
1. Validity of the declaration of petitioners as wilful defaulters.
2. Compliance with the Reserve Bank of India (RBI) Master Circular guidelines.
3. Adherence to principles of natural justice.
4. Proper constitution and functioning of the Committees involved.
5. Legal consequences of being declared a wilful defaulter.

Issue-wise Detailed Analysis:

1. Validity of the Declaration of Petitioners as Wilful Defaulters:
The petitioners challenged their declaration as wilful defaulters by a bank, invoking Article 226 of the Constitution of India. The petitioners argued that the declaration had no statutory backing and infringed their legal rights. The court noted that the Reserve Bank of India (RBI) Master Circular defines a wilful defaulter and outlines the mechanism for identification. The court found that the bank failed to follow the required procedures, including serving the order of the Committee of Executives (COE) to the petitioners, which is a prerequisite for declaring someone a wilful defaulter.

2. Compliance with the Reserve Bank of India (RBI) Master Circular Guidelines:
The court examined the RBI Master Circulars of 2013 and 2015, which provide detailed guidelines for identifying wilful defaulters. The Master Circular stipulates that the identification should be based on the borrower's track record and not on isolated incidents, and the default must be intentional, deliberate, and calculated. The court observed that the bank did not comply with these guidelines, particularly by not serving the COE's order to the petitioners, which is essential for enabling them to make a representation against the decision.

3. Adherence to Principles of Natural Justice:
The court emphasized the importance of natural justice, which requires that the borrower be given a fair opportunity to present their case. The Supreme Court in State Bank of India v. M/s. Jah Developers Pvt. Ltd. and Ors. [AIR 2019 SC 2854] had mandated that the COE's order must be given to the borrower, and the borrower should have the opportunity to represent against it before the Review Committee. The court found that the bank's failure to serve the COE's order directly to the petitioners violated these principles, rendering the declaration process flawed.

4. Proper Constitution and Functioning of the Committees Involved:
The petitioners contended that the Committees were not properly constituted as per the Master Circular. The court did not delve deeply into this issue as the primary contention regarding the non-service of the COE's order was sufficient to quash the declarations. However, the court noted that the Review Committee also failed to independently assess the COE's order and consider the petitioners' explanations.

5. Legal Consequences of Being Declared a Wilful Defaulter:
The court acknowledged the severe consequences of being declared a wilful defaulter, which include barring from institutional finance and potential criminal proceedings. The court reiterated that such drastic measures must be taken with strict adherence to procedural safeguards to prevent arbitrary actions by banks. The court highlighted that the COE and Review Committee must follow the guidelines and ensure that the borrower's rights are protected.

Conclusion:
The court quashed the communications declaring the petitioners as wilful defaulters due to non-compliance with the RBI Master Circular and the principles of natural justice. The court granted the bank liberty to reconsider the case afresh, following the proper procedures and guidelines. The writ petition was allowed, providing relief to the petitioners from the impugned declarations.

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