Ex-independent director gets relief from show cause notice over alleged financial irregularities despite clean forensic audit

The Delhi HC stayed the operation of a Show Cause Notice (SCN) dated 19.06.2024 against an ex-independent director regarding alleged financial irregularities from November 2014 to March 2017. The court found the SCN vulnerable in law, noting that despite a clean chit from forensic auditor and CIRP proceedings initiated in 2018, the petitioner wasn't provided relevant documents or given opportunity before account classification as fraud. Following precedents in Shantanu Prakash and Rajesh Agarwal cases, the court directed respondent to file reply within four weeks and produce complete forensic audit report by Grant Thornton LLP, with matter re-notified for 20.08.2024.

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Issues Involved:
1. Legality of the Show Cause Notice (SCN) issued by the respondent-bank.
2. Allegations of financial irregularities and fraud against the petitioners.
3. Compliance with principles of natural justice.
4. Applicability of Master Directions on Frauds.
5. Prematurity of the writ petition.

Issue-Wise Detailed Analysis:

1. Legality of the Show Cause Notice (SCN):
The petitioners invoked the extraordinary jurisdiction of the High Court under Article 226 of the Constitution of India, seeking to quash the SCN dated 19.06.2024 issued by the respondent-bank. They argued that the SCN was illegal, invalid, and null and void. The petitioners sought relief to quash any steps or actions taken pursuant to the impugned SCN.

2. Allegations of Financial Irregularities and Fraud:
The respondent-bank alleged that the petitioners, particularly petitioner No. 1, committed financial irregularities during the period from November 2014 to March 31, 2017. The corporate borrower, EPC Constructions India Limited (formerly Essar Projects (India) Limited), had availed loan facilities from a consortium of eight banks, including the respondent-bank. The petitioners contended that the company faced economic hardships due to reasons beyond its control and that a forensic audit conducted by Grant Thornton LLP had cleared them of fraud allegations.

3. Compliance with Principles of Natural Justice:
The petitioners argued that the SCN was issued in a mindless and mechanical manner without considering the forensic audit report, which found no financial irregularity. They contended that the SCN overlooked the fact that the petitioners were not directors since December 2017 and that the company was under the Corporate Insolvency Resolution Process (CIRP) from April 20, 2018. The petitioners emphasized that the principles of natural justice required an opportunity to be heard and access to relevant documents before classifying the account as fraud.

4. Applicability of Master Directions on Frauds:
The petitioners referred to clauses 8.96 and 8.12.1 of the Master Directions on Frauds, arguing that penal provisions could only be applied to non-whole-time directors in rare cases based on conclusive proof of their complicity. They also pointed out that no action was taken by the bank within six months from the date when the account was first reported as fraud on the Central Repository of Information on Large Credits (CRILC) platform.

5. Prematurity of the Writ Petition:
The respondent-bank's counsel argued that the writ petition was premature since only an SCN had been issued, and the petitioners had not appeared for a personal hearing despite filing a reply. The counsel cited several case laws to support the argument that the petitioners could not challenge the SCN through a writ petition.

Analysis & Decision:
The Court found that the issues raised by the petitioners required deeper examination. It referred to the Supreme Court's observations in Rajesh Agarwal's case, emphasizing that the principles of natural justice must be observed even if not expressly provided in the Master Directions on Frauds. The Court noted that the SCN was issued despite a clean chit given by the forensic auditor and the initiation of CIRP proceedings. The Court held that the respondent-bank was duty-bound to supply the forensic audit report and other relevant documents to the petitioners.

The Court issued a notice and directed the respondent to file a reply within four weeks and place on record the complete forensic audit report. The operation of the impugned SCN was stayed until the next hearing on August 20, 2024. The matter was kept in the category of 'Part-Heard' for detailed submissions.

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