TaxTMI 
TaxTMI 
2021 (7) TMI 1309
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....e lender for the purpose for which it was availed. The petitioners have diverted funds for other purposes. (c) Short term working capital funds have been utilised for long term purposes. (d) Investments were made in other companies by acquiring equity without approval of the bank. (e) The petitioners have siphoned off funds without using the same for the purpose of which funds were availed. 2. Against each of the aforesaid allegations the evidence and documents relied upon to substantiate, wilful default were the audited Balance Sheets of M/s. Rohit Fero Tech Limited (Principal Debtor) for the year ending 31st March, 2016, 31st March, 2017 and 31st March, 2018. 3. In reply thereto on 9th July, 2019, Advocates acting for the petitioners and the principal borrower purported to show cause. The petitioners also asked the bank to disclose all evidence before the said Wilful Defaulter Identification Committee (WDIC). The bank by communication dated 16th August, 2019 replied to the cause shown by the petitioners. The petitioners through their Advocates replied to the said reply on 9th September, 2019. By a letter dated 9th December, 2019 the WDIC offered a personal hearing to the ....
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....aring for the petitioners, would assail not only the final order of the Review Committee but also the WDIC proceedings conducted to declare the writ petitioners as Wilful Defaulters on, inter alia, the following grounds: (a) That the writ petitioners were not furnished with the documents relied upon by the WDIC. They were, therefore, deprived of an opportunity of defending themselves. (b) The petitioners could not have attended the personal hearing offered by the WDIC while sitting at the branch of the bank in view of the on-going pandemic. The petitioners were thus wrongfully denied the personal hearing albeit virtually from their residence and/or office. The petitioners were, therefore, never offered any personal hearing. He relied on the decision of the Supreme Court in the case of State Bank of India vs. Jah Developers Private Limited & Ors. reported in (2019) 6 SCC 787, Alogoma Steels Ltd. & Ors. vs. SBI & Ors. (Single Bench) and Gouri Prasad Goenka vs. State Bank of India & Anr. in support of this argument. (c) The WDIC could not have found diversion of funds by the petitioners since the entire sale proceeds of the business of the petitioners could not be paid to the le....
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.... relied upon by the WDIC or that documents were supplied to the petitioners after the decision of the WDIC, cannot be accepted. The show cause notice issued by the WDIC itself clearly refers to the audited Balance Sheet of the principal debtor Rohit Fero Tech Ltd. for the year ending 31st March, 2016, 31st March, 2017 and 31st March, 2018. No other documents have been relied upon by the Identification Committee. The findings of the Identification Committee have been culled out only from such audited Balance Sheets. Such Balance Sheets are public documents and/or own documents of the petitioners. The question of formal and/or further supply of the same, therefore, does not and cannot arise. 13. The repeated requests for supply of the documents relied upon by the Identification Committee, therefore, do not appear to be bona fide. Hence the petitioners' argument on that score cannot be sustained. In so far as supply of documents by the Bank under communication of its letter dated 3rd February, 2021, it is apparent and clear that the bank was furnishing for the 2nd time and resubmitting the documents to the petitioners. The arguments of the petitioners that they have been furnishe....
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....er Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, being in public interest, must be construed reasonably. This being so, and given the fact that Para 3 of the Master Circular dated 1-7-2013 permitted the borrower to make a representation within 15 days of the preliminary decision of the First Committee, we are of the view that first and foremost, the Committee comprising of the Executive Director and two other senior officials, being the First Committee, after following Para 3(b) of the Revised Circular dated 1-7-2015, must give its order to the borrower as soon as it is made. The borrower can then represent against such order within a period of 15 days to the Review Committee. Such written representation can be a full representation on facts and law (if any). The Review Committee must then pass a reasoned order on such representation which must then be served on the borrower. Given the fact that the earlier Master Circular dated 1-7-2013 itself considered such steps to be reasonable, we incorporate all these steps into the Revised C....
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.... real prejudice can therefore be said to have been caused to the person complaining of the breach of natural justice. (4) In cases where facts can be stated to be admitted or indisputable, and only one conclusion is possible, the Court does not pass futile orders of setting aside or remand when there is, in fact, no prejudice caused. This conclusion must be drawn by the Court on an appraisal of the facts of a case, and not by the authority who denies natural justice to a person. (5) The "prejudice" exception must be more than a mere apprehension or even a reasonable suspicion of a litigant. It should exist as a matter of fact, or be based upon a definite inference of likelihood of prejudice flowing from the non-observance of natural justice." 18. Further in the Ram Kumar decision (supra) the Hon'ble Supreme Court has stated at paragraph 7 and 8 as follows: "7. It has been pointed out by the High Court that the punishing authority has passed a lengthy order running into seven pages mentioning therein the contents of the charge-sheet, the detailed deposition of the witnesses, as recorded by the enquiry officer, and the findings of the enquiry officer. The explanation submi....
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....ing of reasons by an administrative authority serves a salutary purpose, namely, it excludes chances of arbitrariness and ensures a degree of fairness in the process of decision-making. The said purpose would apply equally to all decisions and its application cannot be confined to decisions which are subject to appeal, revision or judicial review. In our opinion, therefore, the requirement that reasons be recorded should govern the decisions of an administrative authority exercising quasi-judicial functions irrespective of the fact whether the decision is subject to appeal, revision or judicial review. It may, however, be added that it is not required that the reasons should be as elaborate as in the decision of a court of law. The extent and nature of the reasons would depend on particular facts and circumstances. What is necessary is that the reasons are clear and explicit so as to indicate that the authority has given due consideration to the points in controversy. The need for recording of reasons is greater in a case where the order is passed at the original stage. The appellate or revisional authority, if it affirms such an order, need not give separate reasons if the appella....
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....on. 24. Although not pressed in course of arguments it has been pleaded in the writ petition that the bank has instituted proceedings under Section 7 of the IBC, 2016. It is submitted that declaring the writ petitioners as Wilful Defaulters would deprive the petitioners of Rights under Section 32 A of the IBC. It is argued that the impugned orders under Master Circular, 2015 would entail penal consequence on the petitioners and are in derogation of the proceedings under and the provisions of the IBC, 2016. 25. It is evident from Paragraph 275, 276 and 280 of the decision of the Supreme Court in the case of Manish Kumar vs. Union Of India (supra) that the benefits of Section 32 A are not available to every other promoter and guarantor of every corporate debtor. The relevant paragraphs of the aforesaid decision are set out hereinbelow: "275. Section 32A has been divided into three parts consisting of sub-Sections (1) to (3). Under sub-Section (1), notwithstanding anything contained, either in the Code or in any other law, liability of a corporate debtor, for an offence committed prior to the commencement of the CIRP, shall cease. Further, the corporate debtor shall not be liable ....
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.... there is a change in the management and control of the corporate debtor, to a person, who is not a promoter, or in the management and control of the corporate debtor, or a related party of the corporate debtor, or the person who acquires control or management of the corporate debtor, has neither abetted nor conspired in the commission of the offence, then, the prosecution, if it is instituted after the commencement of the CIRP and during its pendency, will stand discharged against the corporate debtor. Under the second proviso to sub-Section (1), however, the designated partner in respect of the liability partnership or the Officer in default, as defined under Section 2(60) of the Companies Act, 2013, or every person, who was, in any manner, in-charge or responsible to the corporate debtor for the conduct of its business, will continue to be liable to be prosecuted and punished for the offence committed by the corporate debtor. This is despite the extinguishment of the criminal liability of the corporate debtor under sub-Section (1). Still further, every person, who was associated with the corporate debtor in any manner, and, who was directly or indirectly involved in the commissi....
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....ly to the control by the Committee of Creditors. As far as protection afforded to the property is concerned there is clearly a rationale behind it. Having regard to the object of the statute we hardly see any manifest arbitrariness in the provision." 26. Useful reference in this context may also be made to the case of Kotak Mahindra decision (supra) paragraph 49. "49. This approach of the Calcutta High Court in interpreting the Master Circular, in our considered opinion, is not correct because it is a settled principle of interpretation that the words in a statute or a document are to be interpreted in the context or subject-matter in which the words are used and not according to its literal meaning. In Principles of Statutory Interpretation, 13th Edn., 2012, Justice G.P. Singh has given this explanation to the rule of literal construction at p. 94: "When it is said that words are to be understood first in their natural, ordinary or popular sense, what is meant is that the words must be ascribed that natural, ordinary or popular meaning which they have in relation to the subject-matter with reference to which and the context in which they have been used in the statute. Brett, ....
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....even if a resolution plan was approved, the petitioners cannot avail the benefits of Section 32A for being promoters and consequently being persons in default under Section 32 A read with Section 2(60) of the Companies Act, 2013. 28. On the question of penal consequences useful reference may be made to the decision of the Kotak Mahindra Bank (supra) particularly paragraph 61. "61. We do not also find any force in the submission of Mr. Bhaskar P. Gupta that the Master Circular has penal consequences and, therefore, has to be literally and strictly construed. Clause 4.3 of the Master Circular, which contemplates criminal action by banks/financial institutions, is extracted hereinbelow: "4.3. Criminal action by banks/financial institutions.--It is essential to recognise 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 (IPC), 1860. Banks/Fls are, therefore, advised to seriously and promptly consider initiating criminal action against wilful defaulters or wrong certification by borrowers, wherever co....