TaxTMI 
TaxTMI 
2019 (4) TMI 394
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....3. The petitioner No.1 decided to set up 3.0 MTPA integrated cement plant in Tehsil Raghuraj Nagar, District Satna along with a 45 megawatt captive thermal power plant. The petitioner No.1 also got limestone mining lease of an area 906 hectare for the period of 30 years from the State of M.P. The petitioner No.1 has also obtained all the approvals from the competent authorities for setting up the plant and placed the orders for supply of key equipment for the establishment of the plant. 4. In the course of its business, the respondent No.1/bank sanctioned term loan facility in the month of April 2008, to petitioner no.1 which was revalidated in the month of October 2009. According to the petitioners, the respondents gave option of either availing the facility of Letter of Credit or disbursement Term Loan. The petitioners opted for credit facility ie., Foreign Letter of Credit, which is an arrangement whereby the bank acting at the request of customer (importer / buyer) undertake to pay in the goods/services to a third party (exporter / beneficiary) by a given date. According to the petitioners upon availing the Foreign Letter of Credit, funds were never disbursed to them and the ....
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....fication Committee, (iii) Agenda of Meeting, (iv) Deliberation of the respondent No.2 etc. 7. The petitioners approached this court by way of W.P.No.1065/2018 interalia sought a direction as to permit them to be represented through their Advocate or CA at the time of personal hearing before the Identification Committee. By order dated 16.1.2018, the writ petition was disposed of with a liberty to the petitioners to make an application before Identification Committee, seeking permission to represent through its Advocate, in light of the judgment passed by the Delhi High Court in the case of Punjab National Bank V. Kingfisher Airlines Ltd decided on 17.12.2015. Thereafter, the petitioner attended the meeting on 18.1.2018 along with an Advocate, but the Identification Committee did not permit the Advocate to represent the petitioners during personal hearing. The petitioners made a various correspondent to the committee, seeking permission to represent through lawyer / chartered accountant who are not partner, director, officer and employer of the petitioner No.1.Identification Committee has denied the representation through chartered accountant, lawyer etc but personal hearing was pr....
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.... consent of the respondentNo.1/ Bank. As per the terms and conditions of undertaking.It was obligatory on the part of the petitioner no.1- company to pay the amount of the said two letter of credit to respondent no.1/bank. Since the petitioner no.1-company arbitrarily without prior permission or intimation to the respondent no.1/ Bank or any of the member bank of consortium has taken away / withdrawn / siphoned / diverted / misused the said equity of Rs. 54.22 Crores, therefore, 'Identification Committee' and the 'Wilful Defaulter' Review Committee of the respondentno.1/Bank have rightly and correctly identified the petitioner no.1 company and its director / guarantor as a 'wilful defaulter' under clause 2.1.3.(b) and 2.1.3.(c) of Master Circular. It has been further submitted that in terms of the RBI Master Circular, the 'Identification Committee' is required to be headed by the executive or equivalent consisting of two other senior officers of the rank of GM / DGM of the Bank. The Identification Committee Review Committee is required to be head by the Bank's Chairman / Chairman and MD / Managing Director and C.O. with two independent directors / non-executive director of the ....
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....wilful defaulter'. 12. Shri Bagadiya, learned senior counsel further emphasised on the definition of 'wilful default' given in the Master Circular according to which the wilful default would be deemed to have occurred in the event of default in making repayment or non-utilization of the finance or the stiffening of the fund. The petitioner is not falling in any of the category as the petitioner neither received any amount / loan from the respondents nor diverted for other purpose. The amount has been utilized for the purpose of purchase of the machines. It is further submitted that as per the master circular isolated transaction should not be a criteria for categorizing the petitioner as 'wilful defaulter'. Therefore, the entire action is beyond authority and contrary to the provisions of the master circular. 13. It is further submitted that the mechanism provided for identification of defaulters in master circular has also not been followed by the respondents. The petitioners were not provided proper personal hearing by the Identification Committee. The petitioner made several representations for providing opportuning of hearing through advocate or chartered accountant but same ....
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....espondent no.1/Bank never denied the maintenance of current account outside the Bank, but all the sale and transaction ought to have been routed from its Bank. Therefore, the petitioners are fulfilling the criteria of 2.2.1.d of the master circular. It is further submitted that the petitioner's company did submit a details of source of fund of Rs. 103.43 Crores brought in via equity including share application money, but later on withdrew the amount of Rs. 54.22 Crores equity share including share application money without honouring its commitment under the Letter of Credit open through the respondent no.1/ Bank. Hence, the petitioners have committed wilful default under the criteria 2.1.3.C. The respondent no.1/Bank paid the amount to the Foreign Exporters who supplied the machine to the petitioners but they have failed to utilise that machine therefore, indirectly, they did not utilise the fund for specific purpose, without honouring its commitment under the letter of credit the petitioners have siphoned its fund. Hence, committed wilful default. The Identification Committee did not commit any error while declaring the petitioner has 'wilful defaulter'. As per the master circular....
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....ount upfront .In view of above respondents be directed to consider the offer of the petitioners before taking any penal consequential action against petitioners . 19. That I have given a due consideration to the arguments of the learned Senior counsel appearing on behalf of the respective parties and in my considered opinion the writ petition is devoid of merit and substance hence the same is liable to be dismissed on the following reasons :- 20. The main emphasis of the petitioners is that the credit facility availed by the petitioners was in the form of non-fund based credit facilities i.e., Foreign Letter of Credit, which is an arrangement between Bank and the foreign exporters. The respondent no.1/Bank never disbursed any fund in the petitioner's account as same was directly paid by way of Foreign Letter of Credit. Since the funds were never disbursed to the petitioners there could never be any occasion of routing and siphoning or diversion of fund. The petitioners have never opted for Rupee Term Loan Facilities, which could involve disbursement of the fund into and from the Bank into petitioner's bank accounts. This issue is no more res intigra .Similar issue was came up bef....
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....ayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. (d) The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed of or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender." 48.We find from the definition of "wilful default" in the Master Circular quoted above that a wilful default would be deemed to have occurred in any of the events mentioned in subclauses (a), (b), (c) and (d) of Clause 2.1. These sub-clauses use the word "lender" and for this reason the Calcutta High Court has taken a view in the impugned judgment that the Master Circular applies only to a lender-borrower relationship and thus only a wilful default by a borrower to the bank which has lent funds by way of loans and advances would be covered under the Master Circular and a party who has not borrowed any money from a bank and has availed the facility of derivative transaction from a b....
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....aning leads to some result which cannot reasonably be supposed to have been the intention of the legislature, that it is proper to look for some other possible meaning of the word or phrase.' The context, as already seen, in the construction of statutes, means the statute as a whole, the previous state of the law, other statutes in pari materia, the general scope of the statute and the mischief that it was intended to remedy." We will, therefore, have to interpret the word "wilful default" in the Master Circular by reading the Master Circular as a whole, looking at the provisions of the 1934 Act and the 1949 Act under which RBI has powers to issue circulars and instructions to the banks, the purpose for which the Master Circular was issued and the mischief that the Master Circular intends to remedy because these constitute the context and the subject-matter in which the definition of "wilful default" finds place in the Master Circular. 50. The Bombay High Court, on the other hand, has come to the conclusion in the impugned judgment that the Master Circular covers also a default in complying with the payment obligations under derivative transactions by relying on the language of....
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.... any Central Act, Government Companies, societies and local authorities owned or controlled by the Central Government. 52. Para 2.3 of the aforesaid instructions issued by the Central Vigilance Commission is extracted hereinbelow: "2.3. Lack of communication between banks 2.3.1. All cases of wilful default of Rs. 25 lakhs and above will be reported by all banks to RBI as and when they occur or are detected. 2.3.2. Whether a matter is a case of wilful default will be decided in each bank by a Committee of Officers. 2.3.3. RBI will circulate the information received from the banks of wilful default, every three months. The data with RBI will also be accessible directly by the banks concerned after the WAN is installed in position. 2.3.4. There should be greater intra-bank communication about wilful default, frauds, cheating cases, etc. so that the same bank does not get exploited in different branches by the same defaulting parties." 53. It will be clear from the language of the aforesaid instructions issued by the Central Vigilance Commission that all cases of wilful default of Rs. 25 lakhs and above were to be reported by all the banks to RBI as and when they occur or....
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....lters amongst banks and financial institutions so that no further bank finance is made available to such wilful defaulters from such banks and financial institutions. The expression "credit information" has not been defined in the Master Circular, but has been defined in Section 45-A(c) of the 1934 Act as follows: "45-A. (c) 'credit information' means any information relating to- (i) the amounts and the nature of loans or advances and other credit facilities granted by a banking company to any borrower or class of borrowers; (ii) the nature of security taken from any borrower or class of borrowers for credit facilities granted to him or to such class; (iii) the guarantee furnished by a banking company for any of its customers or any class of its customers; (iv) the means, antecedents, history of financial transactions and the creditworthiness of any borrower or class of borrowers; (v) any other information which the Bank may consider to be relevant for the more orderly regulation of credit or credit policy." It will be clear from the language of sub-clause (v) of Section 45-A(c) of the 1934 Act quoted above that "credit information" means not only any information rela....
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....lter even though it may not have borrowed funds from the bank in the form of advances or loans. 57. The scheme of collection and dissemination of information on cases of wilful default of Rs. 25 lakhs and above was framed by RBI in the year 1999 when the derivative transactions were not part of the country's economy. Under the FEMA Regulations, 2000 only banks were authorised to deal with the derivative transactions. Section 45-V introduced along with other provisions of Chapter III-D in the 1934 Act by the Reserve Bank of India (Amendment) Act, 2006 declared that transactions in derivatives, as may be specified by RBI from time to time, shall be valid, if at least one of the parties to the transaction is the bank, a scheduled bank, or such other agency falling under the regulatory purview of RBI under the 1934 Act, FEMA Act or any other Act or instrument having the force of law, as may be specified by RBI from time to time. Derivative transactions in India thus were valid only if they were with any bank or any other agency falling under the regulatory purview of RBI because they would have a substantial bearing on the credit system and credit policy in respect of which RBI has r....
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....g company or its borrowers; (c) the disclosure or publication by the banking company or by the Bank of any credit information to any other banking company or in accordance with the practice and usage customary among bankers or as permitted or required under any other law: Provided that any credit information received by a banking company under this clause shall not be published except in accordance with the practice and usage customary among bankers or as permitted or required under any other law. (d) the disclosure of any credit information under the Credit Information Companies (Regulation) Act, 2005 (30 of 2005). (3) Notwithstanding anything contained in any law for the time being in force, no court, tribunal or other authority shall compel the Bank or any banking company to produce or to give inspection of any statement submitted by that banking company under Section 45-C or to disclose any credit information furnished by the Bank to that banking company under Section 45-D." 60. We have already held that information relating to a party who has defaulted in payment of its dues under derivative transactions to the bank is credit information within the meaning of Section....
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.... criminal action against wilful defaulters or wrong certification by borrowers, wherever considered necessary, based on the facts and circumstances of each case under the above provisions of IPC to comply with our instructions and the recommendations of JPC. It should also be ensured that the penal provisions are used effectively and determinedly but after careful consideration and due caution. Towards this end, banks/Fls are advised to put in place a transparent mechanism, with the approval of their Board, for initiating criminal proceedings based on the facts of individual case." All that the aforesaid Clause 4.3 of the Master Circular states is that there is scope even under the exiting legislations to initiate criminal action against wilful defaulters depending upon the facts and circumstances of the case under the provisions of Sections 403 and 415 of the Penal Code, 1860 and the banks and financial institutions are strictly advised to seriously and promptly consider initiating criminal action based on the facts and circumstances of each case under the above provisions of IPC. Thus, the Master Circular by itself does not have penal consequences, whereas Sections 403 and 41....
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....of the Bombay High Court are sustained. We make it clear that we have not expressed any opinion on the individual transactions between the bank and the parties and our judgment is based solely on the interpretation of the Master Circular. Accordingly, the appeal filed by Kotak Mahindra Bank Ltd. against the judgment of the Calcutta High Court is allowed and the appeals filed against the judgment of the Bombay High Court by different parties are dismissed. The parties, however, shall bear their own costs. 21. In view of the above, it is clear that the Bank paid the amount to the foreign exporters for the purchase of machinery by the petitioner. The petitioner is legally bound to repay this amount to the Bank therefore, even if, the loan amount or the fund was not directly disbursed in the petitioner's current account but it was directly paid to the exporters on behalf of the petitioner by the respondent - Bank. Hence, the relationship of lenders and borrower has been established between petitioners and respondent No.1/bank . Since, the petitioners have defaulted in meeting its repayment obligation to the respondent no1./bank even when it has a capacity to pay therefore, rightly inv....