2024 (3) TMI 119 - HC - Indian Laws

Bank's wilful defaulter declaration quashed for procedural violations and reliance on inconclusive forensic audit reports

The Delhi HC quashed a wilful defaulter declaration under the Master Circular on Wilful Defaulters, 2015. The court held that the respondent bank failed ... Declaration of Petitioner as a Wilful Defaulter under the Master Circular on Wilful Defaulters, 2015 - depriving the Petitioner from availing credit facilities for his present and prospective business enterprises - HELD THAT:- In the present case, the satisfaction to issue Show Cause Notice does not appear to have been recorded in accordance with the requirements of the Master Circular. Keeping the object of the Master Circular in mind and the consequences that it entails, both civil and penal, the lender banks have an obligation to comply with the inbuilt safeguards in the Master Circular. Lest, the line between persons who commit mere default in repayment of loan obligations and those who commit Wilful Default in terms of the Master Circular, would get obliterated. Whether the Petitioner committed acts of Wilful Default? - HELD THAT:- The Forensic Audit Report only observed that it is not in a position to comment on their nature of loans and advances made to M/s Value Solar Energy Ltd., as necessary documents were not available. Merely because necessary documents were unavailable to the Forensic Auditor, the Respondent Bank could not have drawn an inference of diversion of funds. In doing so, the Respondent Bank failed to adhere to the requirement of Clause 2.1.3 read with Clause 2.5 of the Master Circular to identify “Wilful Default” which is “intentional, deliberate and calculated” and based on “objective facts and circumstances of the case”. The Respondent Bank cannot merely quote an observation from the Forensic Audit Report, which itself is not conclusive, and conclude that the same amounts to the diversion of funds. The Petitioner did not furnish his personal guarantee for the CDR package nor did he participate in any of the deliberations for the approval of the CDR package. The lender banks still approved the CDR package and acted upon it without the presence and personal guarantee of the Petitioner. The lender banks, therefore, tacitly acquiesced to the Petitioner’s exit from MBSL and approved the CDR package of MBSL without his presence in any capacity or personal guarantee - Further, the undertaking relied upon by the Respondent Bank was not given by the Petitioner but by MBSL. Hence, if there exists a breach of the said undertaking, the remedy, if any, lies against MBSL and elsewhere and not against the Petitioner - thus, resignation from a company per se is not an act of Wilful Default under the Master Circular. Effect of Forensic Audit Report - HELD THAT:- Even under the Indian Evidence Act, 1872, the opinion of an expert witness under Section 45 is not a conclusive proof. It is subject to cross-examination and the opinion and conclusions of an Expert are subject to challenge. In the present scheme of things, the Master Circular casts a specific obligation on the Respondent Bank to act independently and objectively under Clause 2.1.3 read with Clause 2.5 as discussed above. It would, therefore, be unsafe if lender banks start to declare borrowers as Wilful Defaulter merely on the basis of observations made in the Forensic Audit Report without there being an independent application of mind. The lender banks must follow the mandate of Clause 2.1.3 read with Clause 2.5 of the Master Circular and independently find acts of Wilful Default which are “intentional, deliberate and calculated” and the said conclusion should be based on “objective facts and circumstances of the case”. Any other view would lead to consequences where mere cases of default would be categorised as acts of Wilful Default under the Master Circular. The Master Circular is not to be invoked in every case of default but only when the default is Wilful Default as construed under the scheme of the Master Circular. Identification of Wilful Default has to be made keeping in view the track record of the borrower and not on the basis of isolated transactions/incidents - HELD THAT:- The FRS, does not show a consistent negative track record of MBSL. MBSL was seen as a global player in photovoltaic cells. It had presence in several countries. It had serviced its debt and largely repaid the principal dues. The Respondent Bank, under Clause 2.1.3 read with Clause 2.5, was obligated to reflect upon the entire track record of MBSL and then conclude whether there existed events of Wilful Default and not on the basis of isolated transactions/incidents. Consequences of admitting MBSL for CDR under the CDR Scheme - HELD THAT:- This Court is of the view that it is incumbent upon banks who are dealing with public funds and discharging a public duty to make appropriate enquiries as to whether a borrower is in genuine financial difficulty or whether there exist events of fraud and malfeasance. If the lender banks find fraud or malfeasance, the CDR-EG must either refuse CDR completely or impose such additional onerous conditions as provided in the CDR Scheme itself - In the present case, the lender banks were fully aware of all the transactions, which are now alleged to be acts of Wilful Default. This fact is part of the documents leading to the finalization of the CDR scheme. Despite noting all transactions, financial statements, balance sheets, TEV Report and Stock Audit Report, the lender banks placed MBSL in Class-B of CDR Master Circular which cannot be assigned if there is diversion of funds. They found no occasion to order a forensic audit of MBIL before finalization of CDR scheme. The lender banks, therefore, never treated the alleged acts of Wilful Default as an act of diversion or siphoning either during finalization of CDR scheme or after its failure. The lender banks may become aware of such acts subsequently, may be, on their own, or on the basis of subsequent Forensic Audit Report. Having considered such acts, which were known subsequently, the lender banks may take an objective decision under the Master Circular on whether such acts constitute Wilful Default or not. In such a situation, the mere fact that an earlier CDR Scheme was finalised and nothing negative was flagged at that stage, may not come in way of the lender banks in invoking jurisdiction under the Master Circular. However, it may not be open for lender banks to classify known acts as events of Wilful Default merely because subsequently, in respect of the same known acts, the Forensic Audit Report has made certain observations. To declare a person as a Wilful Defaulter, lender banks have to independently find that the “Wilful Default” is “intentional, deliberate and calculated” and the said conclusion is based on “objective facts and circumstances of the case”, as required under the Master Circular. The Forensic Audit Report, at best, can act as a piece of corroboration for the said exercise, but not the sole basis. The reasons assigned in the impugned order dated 20.04.2023 passed by the Review Committee confirming the Petitioner as Wilful Defaulter under the Master Circular are unsustainable and the impugned order is accordingly, quashed and set aside - Petition allowed. Issues Involved:1. Satisfaction to issue Show Cause Notice.2. Whether the Petitioner committed acts of Wilful Default.3. Effect of Forensic Audit Report.4. Identification of Wilful Default based on track record.5. Consequences of admitting MBSL for CDR under the CDR Scheme.Summary:1. Satisfaction to issue Show Cause Notice:The Respondent Bank issued a Show Cause Notice to the Petitioner based solely on observations in the Forensic Audit Report, which is not in conformity with the Master Circular. The lender banks must independently find that the 'Wilful Default' is 'intentional, deliberate and calculated' based on 'objective facts and circumstances of the case.'2. Whether the Petitioner committed acts of Wilful Default:The Identification Committee of the Respondent Bank declared the Petitioner a Wilful Defaulter based on three grounds:- Security Deposits: The deposits made by MBSL to MBIL under lease agreements were factually incorrect and not 58.82 times of the rental but only 3.05 times. The lease agreements were necessary for MBSL's operations in the SEZ and were not acts of diversion of funds.- Lease Agreements: The operating leases executed by MBSL in favor of MBIL were necessary due to regulatory requirements and did not result in a significant loss or profit, thus not amounting to diversion of funds.- Investments in Helios Photovoltaic Ltd.: The investments made were strategic and known to the lender banks, who required MBSL to retain them. The investments were not acts of diversion of funds.3. Effect of Forensic Audit Report:The Forensic Audit Report is not a conclusive proof of any illegality. The lender banks must act independently and objectively under Clause 2.1.3 read with Clause 2.5 of the Master Circular. The Forensic Audit Report can act as corroboration but not the sole basis for declaring a Wilful Default.4. Identification of Wilful Default based on track record:The Master Circular requires the identification of Wilful Default to be based on the track record of the borrower and not isolated incidents. MBSL had a consistent track record of servicing its debt until external factors affected its financial health. The Respondent Bank failed to consider the entire track record of MBSL.5. Consequences of admitting MBSL for CDR under the CDR Scheme:The lender banks were aware of all transactions and still classified MBSL as a Class-B borrower under the CDR Scheme, which applies to entities affected by external factors, not diversion of funds. The lender banks cannot retrospectively classify known acts as Wilful Default based on subsequent Forensic Audit observations.Conclusion:The reasons assigned in the impugned order dated 20.04.2023 by the Review Committee confirming the Petitioner as Wilful Defaulter are unsustainable. The Writ Petition is allowed, and the impugned order is quashed and set aside.