Bank must provide supporting documents when declaring wilful defaulter status, violating natural justice principles otherwise

Bombay HC ruled in favor of petitioner challenging wilful defaulter declaration by Union Bank. Court held that bank's refusal to provide supporting material violated natural justice principles and constitutional protections. HC emphasized that in proceedings with serious civil consequences, noticee must receive detailed notice enabling proper defense. Union Bank was directed to make proper disclosure of materials underlying the show cause notice, allowing petitioner to submit fresh reply. Bank permitted to withdraw final order dated February 28, 2023 and draft order dated August 5, 2022. All agencies were ordered to remove petitioner's identification as wilful defaulter from public information resources.

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Issues Involved:
1. Adherence to principles of natural justice.
2. Provision of inspection of relevant material.
3. Process for declaring a person as a wilful defaulter under the RBI's Master Circular.
4. Compliance with due process and transparency requirements.

Summary of Judgment:

1. Adherence to Principles of Natural Justice:
The Petitioner sought declaratory reliefs to ensure adherence to principles of natural justice, including the provision of inspection of relevant material, in proceedings initiated by the Union Bank of India to declare the Petitioner as a "wilful defaulter."

2. Provision of Inspection of Relevant Material:
The Petitioner requested access to all material and records on which the Show Cause Notice (SCN) was based. This request was reiterated multiple times but was not addressed by Union Bank. The Court emphasized that due compliance with principles of natural justice must include providing access to the material on which allegations are based, as underscored by the Supreme Court in T.Takano Vs Securities and Exchange Board of India & Anr.

3. Process for Declaring a Person as a Wilful Defaulter:
The RBI's Master Circular on Wilful Defaulters outlines a specific process for declaring a person as a wilful defaulter. This includes:
- Examination of evidence by an Identification Committee.
- Issuance of a reasoned draft order.
- Review of the draft order by a Review Committee.
- Finalization of the order upon confirmation by the Review Committee.

The Court found that Union Bank failed to provide a reasoned draft order and did not supply the underlying material to the Petitioner, thereby violating the principles of natural justice.

4. Compliance with Due Process and Transparency Requirements:
The Court highlighted the need for a transparent mechanism as mandated by the RBI's Master Circular, which requires banks to provide detailed and proper notice of reasons for forming a prima facie view and to ensure that the exercise of discretion is reasonable and not arbitrary. The Court referred to previous judgments, including State Bank of India Vs. Jah Developers Private Limited and Others, which emphasized the importance of reasoned orders and the ability of the noticee to make representations.

Findings and Analysis:
The Court found that Union Bank's stance, which asserted that it was not obligated to provide any material to the Petitioner and that the onus was on the Petitioner to prove his innocence, was in conflict with the rule of law. The Court noted that the Review Committee's final order was a near-verbatim replication of the SCN and did not consider the Petitioner's submissions.

Directions Issued:
- Union Bank was permitted to withdraw the final order and the draft order related to the Petitioner.
- Union Bank was directed to supply all material underlying the SCN.
- The Petitioner was granted liberty to provide a fresh reply to the SCN.
- The Identification Committee was directed to deal with the Petitioner's fresh reply and submissions.
- Banks and financial institutions were instructed to identify committee members and share reasoned orders.
- Agencies that published the Petitioner's name as a wilful defaulter were directed to remove such identification.

Conclusion:
The writ petition was disposed of with the Court making the rule absolute in the stated terms and emphasizing that the law declared in this judgment should guide the conduct of proceedings under the Master Circular. No order as to costs was made.

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