2024 (5) TMI 1323 - HC - Indian Laws

Banks must provide complete documents for Show Cause Notices to enable effective defense against fraud allegations

Delhi HC held that banks must provide complete documents forming the basis of Show Cause Notices (SCNs) to enable effective defense, as withholding ... Bank Loan - Proposal for declaring the company as 'Fraud' - Violation of principles of natural justice - non-compliance with the agreed terms of the loan documents and various irregularities in the loan account - suspicion of fraudulent activities in the account - HELD THAT:- This Court passed various directions directing the petitioner to approach the respective banks with a list of documents that were required by the petitioner for the purpose of submitting a comprehensive reply to the said SCNs. Upon the petitioner approaching the said banks, certain documents were provided to the petitioner. However, it is the case of the petitioner that complete documents, on the basis of which SCNs have been issued to the petitioner, have not been provided. It is settled law that fair procedure and the Principles of Natural Justice require that the requisite documents, which form the basis of a SCN, ought to be provided to the concerned party in order to enable such party to submit a proper reply to answer all the allegations raised against it. If the relevant documents are not provided to a party, then, the whole procedure of issuance of a SCN and filing a reply thereto, would be reduced to an empty formality. No party can be expected to respond to a SCN in an effective manner, in the absence of the underlying documents, which form the basis of the said SCN. Similarly, in the case of T. TAKANO VERSUS SECURITIES AND EXCHANGE BOARD OF INDIA & ANR. [2022 (2) TMI 907 - SUPREME COURT], the Supreme Court has held in categorical terms that it would be fundamentally contrary to the Principles of Natural Justice, if the relevant materials were not disclosed to the noticee. The relevant documents that form the basis of issuance of a SCN, ought to be provided to the concerned party in order to enable such a party to raise its defense effectively. Such fundamental right of a party cannot be taken away by denying a proper opportunity to submit an efficacious reply, which would not be feasible in the absence of requisite documents that form the core foundation of a SCN. This assumes all the more importance, as on the basis of the defense raised by such a party, proceedings thereto, against the said party, may be dropped in appropriate cases. The petitioner and/or his authorized representative shall be allowed inspection of the records of the company, as available with the lead bank, i.e., SBI - Since, record of the company is also stated to be in the possession of the RP, it is directed that the petitioner and/or his authorized representative shall also be allowed to inspect of the record of the company, as available with the RP. The writ petition is disposed off. Issues Involved:1. Quashing and setting aside of Show Cause Notices (SCNs) issued by various banks.2. Petitioner's lack of access to necessary documents for responding to SCNs.3. Principles of Natural Justice and fair procedure in the context of SCNs.4. Petitioner's request for personal hearing.5. Inspection of records held by the lead bank and Resolution Professional (RP).Issue-wise Detailed Analysis:1. Quashing and Setting Aside of SCNs:The petitioner sought to quash and set aside the SCNs issued by multiple banks, including SBI, Canara Bank, Central Bank of India, ICICI Bank, Union Bank of India, and IDBI Bank, for declaring the account of M/s Educomp Solution Limited as 'Fraud'. The petitioner, an ex-director and guarantor of the company, argued that the SCNs were issued without supplying the requisite documents, rendering them bad in law and liable to be quashed.2. Petitioner's Lack of Access to Necessary Documents:The petitioner contended that since the company was admitted into CIRP and the RP took over management, he had no access to the company's documents, including banking transactions and loan documents. Despite writing multiple letters to the respondent-banks requesting these documents, the petitioner received no response. The petitioner argued that without these documents, he could not effectively reply to the SCNs.3. Principles of Natural Justice and Fair Procedure:The court emphasized that fair procedure and the Principles of Natural Justice require that documents forming the basis of a SCN must be provided to the concerned party. Citing the Supreme Court's ruling in Natwar Singh v. Director of Enforcement, the court noted that the absence of such documents reduces the procedure to an empty formality. The court further referenced T. Takano v. Securities and Exchange Board of India, highlighting that non-disclosure of relevant materials fundamentally contradicts the Principles of Natural Justice.4. Petitioner's Request for Personal Hearing:The petitioner relied on several judgments, including State Bank of India v. Rajesh Agarwal, to argue that personal hearings should be granted. The respondent-banks, however, contended that personal hearings are not mandatory and cited the Supreme Court's order in Rajesh Agarwal to support their stance. The court acknowledged the importance of the Principles of Natural Justice in the context of declaring an account as 'Fraud', which could lead to severe consequences for the borrower, including a credit freeze and civil death.5. Inspection of Records Held by the Lead Bank and RP:The court directed that the petitioner or his authorized representative be allowed to inspect the records of the company held by the lead bank (SBI) and the RP. The petitioner was to identify specific documents required from these records, which would then be provided to him. The cost of providing these documents would be borne by the petitioner. The entire process was to be completed within a specified timeframe, allowing the petitioner to file a reply to the SCNs and request a personal hearing if necessary.Conclusion:The court disposed of the petition with the following directions:i. The petitioner or his authorized representative shall be allowed inspection of the company's records with SBI and the RP.ii. The petitioner shall identify specific documents required from these records.iii. The identified documents shall be provided to the petitioner, with costs borne by him.iv. The process of inspection and document provision shall be completed within stipulated timeframes.v. The petitioner shall file a reply to the SCNs within one week of receiving the documents.vi. The petitioner may request a personal hearing, which the banks shall consider accordingly.The petition was disposed of in terms of these directions.