TaxTMI 
TaxTMI 
TaxTMI 
2020 (9) TMI 844
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.... time. Both these notices have been challenged in this writ petition and the petitioners seek cancellation of these notices. 2. The petitioners claim to be the erstwhile promoters/directors of Mohan Motors Udyog Private Limited (the Company) which is presently in a Corporate Insolvency Resolution Process (CIRP) under the relevant provisions of The Insolvency and Bankruptcy Code 2016 (IBC). The insolvency proceedings commenced on 17th March, 2020 by an order of the National Company Law Tribunal, Kolkata Bench. 3. The contentions of Mr. Sabyasachi Chowdhury, learned counsel appearing for the petitioners, are two-fold. Counsel submits that by reason of the moratorium under section 14 of the IBC being operational in respect of the Company, proceedings under the master circular of the RBI for being declared as wilful defaulters should be stayed during the operation of the moratorium period. The second limb of Mr. Chowdhury's argument is that the impugned Show Cause Notice dated 14th November, 2019 and the notice of hearing dated 6th August, 2020 are bad by reason of the fact that they have not been issued by the committee which is empowered to do so under the RBI Master Circular on Wi....
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....ubsequent to its commission in that the show cause notice can be approved anytime by the Identification Committee. In this connection, Maharashtra State Mining Corporation versus Sunil: (2006) 5 SCC 96 and National Institute of Technology versus Pannalal Choudhury: (2015) 11 SCC 669 are relied on. 5. I have considered the contentions urged on behalf of the parties. But first, a brief explainer on the RBI guidelines contained in the Master Circular. The scheme framed by the RBI was to identify events of wilful default by borrowers where the particular unit has defaulted in its payment obligations to the lender despite having a capacity to pay or has diverted the borrowed funds for some other purpose other than the specific purpose for which the funds were made available. The scheme evolved a mechanism of identifying such defaults by various methods of monitoring and prevention. The first point in this writ petition is whether the Company and the petitioners can be subjected to proceedings for identification of Wilful Defaulters under the RBI Master Circular, 2015 in the face of the ongoing CIRP under the Insolvency and Bankruptcy Code, 2016. Section 14 of the IBC is relevant. Parag....
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....the Central Government in consultation with any financial regulator; (b) a surety in a contract of guarantee to a corporate debtor. (4) The order of moratorium shall have effect from the date of such order till the completion of the corporate insolvency resolution process: Provided that where at any time during the corporate insolvency resolution period, if the Adjudicating Authority approves the resolution plan under sub-section 1 of section 31 or passes an order liquidation of corporate debtor under Section 33, the moratorium shall cease to have effect from the date of such approval or liquidation order as the case may be." It is clear from section 14(3)(b) that the prohibition on institution or continuation of suits and other proceedings against the corporate debtor do not extend to a surety. It is undisputed that both the petitioners are erstwhile guarantors of the Company, namely, the corporate debtor. Since counsel for the petitioners has also relied on sections 29-A and 31 of the IBC, these provisions should also be seen in the context of what the petitioners seek. Section 29-A (Persons not eligible to be Resolution Applicant) lists the categories of persons who are ....
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.... to make payment of the dues, such guarantor would also be treated as a wilful defaulter. This treatment of non-group corporate and individual guarantors was made applicable with effect from September 9, 2014 and not to cases where guarantees were taken prior to this date. Banks/FIs may ensure that this position is made known to all guarantors at the time of accepting guarantees." 8. Hence the argument that section 29-A or 31 would provide a shield against the operation of section 14(3)(b) and that the petitioners would come under the immunity-blanket of section 14 is contrary to the law governing insolvency resolution process and the RBI guidelines for dealing with wilful defaults of corporate entities. Although State Bank of India vs. Jah Developers (P) Ltd. (2019) 6 SCC 787 threw a light on the harsh consequences of being declared a wilful defaulter, it was a decision on whether legal representation can be permitted before a declaration of wilful default is made. The Supreme Court held that the proceedings under the Master Circular, being essentially in the nature of in-house proceedings and of an administrative character, cannot permit legal representation. 9. The next issue ....
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....w Cause Notice; 2. You are hereby called upon to show cause and make submissions in writing within 30 days from the date of receipt of this letter as to why your name should not be included in the list of wilful defaulters as per RBI guidelines. 10. The question which would arise is whether the post of Deputy Managing Director (mentioned as the head of the 'appropriate committee' in the impugned notice) is equivalent to that of the Executive Director (under clause 3(a)) of the Master Circular. The stress on equivalence would be justified from the use of this very expression in clause 3(a) which allows for a loosening of the composition of the Committee by prescribing "...headed by an Executive Director or equivalent..." (underlined for emphasis). It is also significant that the show cause notice clarifies that the composition of the Committee- or the departure from the recommended composition- is "as approved by RBI". It is also significant that clause 3 of the Master Circular slackens the rigour of the requirements by using the expression "...should generally include the following" and puts the stress more on a pyramidal power structure of the Committee of a head who is ranked ....
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....Proposal "For approval for identification of Wilful Defaulters and issuance of Show Cause Notices". The Resolution further encloses "Agenda Item No. 2080" followed by factual events of default corresponding to the relevant clauses of the Master Circular. The Resolution bears the signatures of the Deputy Managing Director as the Chairman of the "Wilful Defaulter Identification Committee- I" and two General Managers as the other Members of the said Committee. The Resolution was filed later in court on behalf of the respondents and forwarded to the petitioners on the same day. 12. In this background, the questions which would naturally arise are: a) It is necessary for a Show Cause Notice to disclose the basis of the conclusion arrived at by the Committee under clause 3(a)? and b) If yes, how can such application of mind/formation of opinion be made apparent on the face of the Show Cause Notice? 13. Both these questions can be answered from a plain reading of clause 3 of the Master Circular. First, the clause does not mandate that the Show Cause Notice must disclose the basis of the satisfaction of the concerned Committee or the conclusion arrived at from the evidence before it.....
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.... Patodia pronounced on 28th February, 2020 was also concerned with a challenge to a Show Cause Notice on the ground of improper constitution of the Identification Committee and non-application of mind in classifying the writ petitioner as a wilful defaulter. The Division Bench construed the RBI Guidelines and held that there had not been any delegation of the functions of the Identification Committee as the power only involved identifying a wilful defaulter and a final order in that regard would have to be made by the Review Committee. The decision proceeded on the basis that identifying a wilful defaulter is essentially a fact-finding exercise followed by an administrative decision. The Division Bench accordingly was of the view that the Regional Office of the appellant/respondent being delegated the task of issuing the Show Cause Notice would not by itself invalidate the proceedings which had been initiated under the Master Circular for declaring the petitioners as wilful defaulters. Relying on The Secretary, Ministry of Defence vs Prabhash Chandra Mirdha; (2012) 11 SCC 565, it was additionally held that a Show Cause Notice does not give rise to a cause of action unless a strong ....
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....rst Committee under clause 3(b) would be subject to review by a second Committee under clause 3(c). Hence, no finality is attached to the decision of the first/identification Committee and more so at the stage of a Show-Cause Notice. Further, the Petitioners in this case received the impugned show-cause notice dated 14th November, 2019 together with the Annexure on 18th November, 2019. The date of receipt would appear from the reply of the petitioners dated 19th December, 2019 to the Show-Cause Notice. In the said letter, the petitioners contended, inter alia, that the appropriate Committee had not been formed in keeping with the RBI guidelines and called for withdrawing of the Show-Cause Notice. The respondent Bank thereafter issued a "Notice for Personal Hearing" dated 17th July, 2020 calling upon the petitioners to appear before the "Wilful Defaulter Identification Committee" on 29th July, 2020 at 11 a.m. for making appropriate submissions. The petitioners were given the option to make submissions through video conferencing on the specified date. On receiving the notice for personal hearing, a chain of correspondence followed between the parties on 28th July, 2020 whereby the re....