Central Bank of India's willful defaulter declaration quashed due to reliance on rejected Technical Audit Report

The Calcutta HC set aside and quashed decisions by Central Bank of India's First Committee and Review Committee declaring petitioners as willful defaulters. The court held that the bank's reliance on a Technical Audit Report (TAR) was legally untenable since NCLT had refused to accept the report, and the bank as consortium member was bound by this order. The lead bank Punjab National Bank had already reversed its willful defaulter declaration based on NCLT's dismissal of the TAR. The court found no substantiated link between consortium loans and alleged misuse of funds, and noted the Review Committee failed to provide reasoned orders, vitiating the entire process.

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Issues Involved:

1. Legitimacy of the First Committee's decision to declare petitioners as Willful Defaulters.
2. Validity of the Review Committee's decision affirming the First Committee's declaration.
3. Reliance on the Transaction Audit Report (TAR) by the First Committee and Review Committee.
4. Compliance with natural justice and procedural requirements.

Summary:

Legitimacy of the First Committee's Decision

The petitioners challenged the decision of the Willful Defaulter Identification Committee (First Committee) to declare them as Willful Defaulters under the Master Circular on Wilful Defaulters issued by the RBI on July 1, 2015. The First Committee's decision was based solely on a Transaction Audit Report (TAR) by M/s. Deloitte Touche Tohmatsu India, LLP, which itself was inconclusive and not independently verified. The TAR explicitly stated it was not suitable for legal proceedings and was prepared solely for internal use, thus vitiating its conclusiveness, veracity, and credibility.

Validity of the Review Committee's Decision

The petitioners also challenged the Review Committee's (RC) decision to affirm the First Committee's declaration. The RC's decision was found to be grossly mechanical, clubbing twenty-one entities together without individual consideration and relying solely on the TAR. The RC failed to provide a reasoned order, as required by the Supreme Court in State Bank of India vs. Jah Developers Private Limited and Others, thereby violating principles of natural justice.

Reliance on the Transaction Audit Report (TAR)

The TAR was prepared by the Auditor at the behest of the Liquidator in a Corporate Insolvency Resolution Process (CIRP) and was rejected by both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT) for lack of independent material. The Central Bank of India, being a constituent of the creditor-Consortium, was bound by the NCLT order refuting the TAR. The lead Bank of the Consortium, Punjab National Bank (PNB), also dropped the charges of willful default based on the NCLT's rejection of the TAR.

Compliance with Natural Justice and Procedural Requirements

The RC adopted a mechanical approach, failing to provide individual consideration and a reasoned order. The Supreme Court mandates that the RC must pass a reasoned order on the borrower's representation, which was not done in this case. The decisions of both the First Committee and the RC were thus vitiated for non-compliance with natural justice and procedural requirements.

Conclusion

The decisions of both the First Committee and the RC declaring the petitioners as Willful Defaulters are set aside and quashed. All consequential steps, including the uploading of the names of the petitioners as Willful Defaulters, shall be immediately reversed by the respondents. There will be no order as to costs.

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