Bank Must Provide All Documents Behind Show Cause Notice for Willful Defaulter Declaration Within Two Weeks

Delhi HC directed respondent bank to provide all underlying documents forming basis of show cause notice (SCN) dated 18th May 2024 to petitioners within two weeks, regarding willful defaulter declaration for loan account involving fund diversion. Court held that principles of natural justice require provision of all documents underlying SCN to enable effective reply. Petitioners must file SCN reply within four weeks after receiving documents. Petition disposed of with these directions.

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Issues Involved:
1. Validity of the Show Cause Notice (SCN) issued by the respondent-bank.
2. Compliance with the Principles of Natural Justice.
3. Jurisdiction and bona fides of the respondent-bank in issuing the SCN.
4. Status and implications of the Corporate Insolvency Resolution Process (CIRP).
5. Agreement among consortium banks regarding restructuring and assignment of debt.

Detailed Analysis:

1. Validity of the Show Cause Notice (SCN) Issued by the Respondent-Bank:
The petitioners sought to set aside the SCN dated 18th May 2024, issued by the respondent-bank, declaring them as "Willful Defaulters" concerning the loan account of M/s Agson Global Pvt. Ltd. The petitioners argued that the SCN was contrary to law and facts, and was issued with mala fide intention to scuttle the CIRP process.

2. Compliance with the Principles of Natural Justice:
The Court emphasized the necessity of adhering to the Principles of Natural Justice, highlighting that the petitioners were not provided with the underlying documents forming the basis of the SCN. The Court cited the Supreme Court's judgment in State Bank of India and Ors. versus Rajesh Agarwal and Ors., (2023) 6 SCC 1, which underscores that the principles of natural justice are substantive obligations and must be followed by decision-making authorities. The Court directed the respondent-bank to provide all underlying documents to the petitioners within two weeks, ensuring the petitioners could file an effective reply.

3. Jurisdiction and Bona Fides of the Respondent-Bank in Issuing the SCN:
The petitioners contended that the respondent-bank's action was not bona fide and constituted an abuse of process, as the respondent had no jurisdiction to issue the SCN. They argued that the SCN was issued with the intent to create deliberate hurdles in the CIRP process. The respondent-bank, however, maintained that the petition was premature and that the bank was entitled to take action as per law, alleging that the petitioners were guilty of fund diversion and defaulting on payments.

4. Status and Implications of the Corporate Insolvency Resolution Process (CIRP):
The petitioners highlighted that the company was undergoing CIRP under the Insolvency and Bankruptcy Code, 2016. They argued that the impugned SCN was issued by the respondent-bank, which held a mere 2.47% stake in the consortium, to disrupt the resolution process. The petitioners pointed to various consortium meetings and reports, including the Minutes of the Meeting dated 24th March 2023, the Joint Inspection Report dated 10th July 2023, and the Techno Economic Viability Study Report dated 24th August 2023, all indicating that the consortium banks, including the respondent-bank, had agreed on restructuring and assignment of debt to NARCL.

5. Agreement Among Consortium Banks Regarding Restructuring and Assignment of Debt:
The petitioners presented evidence of the consortium banks' agreement on restructuring and assigning the company's debt to NARCL. The Minutes of the Consortium Meeting held on 29th January 2024, and subsequent orders from NCLT and NCLAT, demonstrated that the majority of lenders, holding more than 93% shares, had agreed to the restructuring. The Forensic Audit Report also indicated no case of fund diversion or fraud. Despite this, the respondent-bank issued the SCN, allegedly to impede the process.

Court's Directions:
The Court directed the respondent-bank to provide all underlying documents to the petitioners within two weeks. The petitioners were to file a reply within four weeks thereafter and could request a personal hearing. If the Committee of "Willful Defaulters" decided against the petitioners, they could represent to the Review Committee. Any adverse decision by the Review Committee would not be effective for two weeks, allowing the petitioners to seek legal remedies.

Conclusion:
The petition was disposed of with specific directions to ensure compliance with the Principles of Natural Justice and to allow the petitioners a fair opportunity to respond to the SCN. The Court's order aimed to balance the procedural fairness while allowing the respondent-bank to proceed as per law.

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