TaxTMI 
TaxTMI 
TaxTMI 
2024 (6) TMI 837
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.... willful defaulters. Respondents rely upon the Master Circular dated 1st July 2015 issued by the Reserve Bank of India on willful defaulters ("RBI's Master Circular") for issuing the willful defaulter orders. Respondents for issuing the fraud declaration rely upon the Master Directions on Fraud - Classification and Reporting by Commercial Banks and Select Financial Institutions dated 1st July 2016 issued by the Reserve Bank of India on the declaration of fraud ("RBI's Master Directions on Fraud"). 3. Petitioner no. 1 in both petitions is the principal borrower of the respondent no. 2 branch of the respondent no. 1 bank. In the writ petition of Immense Packaging Private Limited, petitioners nos. 2 and 3 are the directors of petitioner no. 1 and petitioner no. 3 is the guarantor of petitioner no. 1 in respect of financial assistance availed from respondent no. 2 bank. Petitioner no. 4 was an erstwhile guarantor in respect of financial assistance availed by petitioner no. 1 from respondent nos. 1 and 2. In the writ petition of Govinda Industries Private Limited, petitioners nos. 2 to 4 are directors of petitioner no. 1, and petitioners nos. 2 and 5 are the guarantors of petitioner no....
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....entification Committee - II (WDIC) was supplied to the petitioners. The petitioners accordingly made a representation to the willful defaulters review committee. Accordingly, on 7th October 2021, the review committee rejected the representation of the petitioners. Hence, these petitions. SUBMISSIONS ON BEHALF OF THE PETITIONERS : 8. Learned counsel for the petitioners submitted that the Hon'ble Supreme Court in the decision of SBI and others Vs. Rajesh Agarwal 2023 SCC Online 342 has held that the RBI's Master Directions on Fraud mandates compliance with the basic principles of natural justice, i.e. issuance of show cause notice and giving an opportunity of hearing before the account is declared as fraud. Learned counsel for the petitioners further submitted that respondents, in their affidavit-in-reply, have failed to demonstrate any compliance with regard to the issuance of show cause notice or an opportunity of being heard to the petitioners before declaring petitioner no. 1's loan account as fraud. A perusal of the copy of the fraud declaration produced on record by the respondents by way of affidavit-in-reply indicates that the same has been passed mechanically, thou....
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....ul defaulters. The review committee failed to give any cogent reasons for not accepting the explanation given by the petitioners about each transaction, which was relied upon by the respondents, to declare the petitioners as willful defaulters. The petitioners had, in their reply, contended that the petitioners are part of a group of three companies and they had conducted their affairs in such a manner that the manufacturing entity was purchasing raw materials from another group of companies. Hence, the accounts of all three companies reflected payments to and for the group company. All three companies of the group were banking with respondent no. 1-Bank from the same branch, and thus, it was not unknown to the bank that transactions were happening between these two companies as they had legitimate business dealings with each other. The allegations in the show cause notice regarding 12 crores being paid Rs. to the director Pragya Kela, has been specifically explained that such payment was never made, and thus out of the alleged payments credited of Rs.14.79 crores, the sum of Rs.12 crores was a mistake. The remaining transaction, worth Rs. 2.79 crores, was explained by the petition....
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....al breach of trust and fraudulent engagement through forged instruments and manipulation of books of accounts through vicious accounts and conversion of the property. The respondents, via email dated 24th July 2019, had called upon the petitioners to participate and cooperate with the forensic audit members. Hence, there is no substance in the grounds raised on behalf of the petitioners that order declaring the petitioner no. 1's account as a fraud account is in breach of the principles of natural justice. He submitted that two reports of the forensic auditors submitted prior to the declaration of petitioner no. 1's account as fraud were supplied to the petitioners and their response was taken into consideration before issuing the fraud declaration. 15. With regard to the orders passed, declaring the petitioners as willful defaulters, learned counsel for the respondents submitted that the response of the petitioners was taken into consideration by WDIC Committee. He submitted that it is not in dispute that petitioners have committed default in repayment of loan amount. Inspite of giving adequate opportunities to the petitioners, before the fraud declaration and before declaring pe....
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....d by the bank. The letter issued by the bank for a personal hearing states that WDIC has offered an opportunity for a personal hearing to the petitioners to make their submissions before the committee. Pursuant to the said letter, a meeting was conducted before WDIC. Both the petitioners were represented through its directors. The minutes of the meeting dated 18th February 2021 record the presence of the parties and further refer to the applicable RBI instructions for willful default, the reasons classified for declaring the petitioners as willful defaulters, response/submissions made on behalf of the petitioners and the decision of the WDIC. 18. The reasons recorded by WDIC declaring the petitioners as willful defaulters in the case of Immense Packaging Private Limited refers to the transfer of funds to the subsidiary companies and transaction of 12 crores for classifying Rs. the petitioners as willful defaulters in criteria 2.2.1 of the RBI's Master Circular. In the case of Govinda Industries Private Limited, the reasons recorded by WDIC refer to substantial funds available with the company and failure on the part of the company to repay the loan amount. However, it is the case ....
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....l justice before declaring the petitioners as willful defaulters. This court in the case of Milind Patel has taken a view that RBI's Master circular ensures transparent mechanism that would entail transparency to the noticee by notifying all the relevant facts that forms basis of determination and whether there has been a willful default. Thus, the discretion conferred on the commercial banks to inflict penal consequences was meant to be kept to the bare minimum, which underlines that exercise of the discretion has to be reasonable and not arbitrary. This court further observed that the absence of transparency with the reasons would render the exercise of discretion to be arbitrary. Thus, in view of the facts of the present case, the legal principles laid down by this court, in the case of Milind Patel squarely apply to the facts of both the petitions. It is a matter of record that the prima facie view taken by the bank in the show cause notice was not supported by any material supplied to the petitioners. Thus, the petitioners accused of being willful defaulters were unable to discharge their burden to prove their innocence. 22. The orders declaring the petitioners as willful def....
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.... the vice of arbitrariness." (emphasis applied) 24. In the present case, there is no dispute that the bank has failed to issue a show notice and give an opportunity for a hearing to the petitioners before issuing the fraud declaration. The Bank has even failed to produce any record to show that a copy of the fraud declaration was supplied to the company. Thus, the legal principles laid down by the Hon'ble Supreme Court in the case of SBI and others Vs. Rajesh Agarwal squarely applies to the facts of both the petitions. The legal principles laid down in the said decision mandate compliance with the basic principles of natural justice, namely issuance of show cause notice and an opportunity to be heard before declaring the account as fraud. Hence, we are of the view that the declaration of the company's account as fraud stands vitiated on account of breach of principles of natural justice. 25. However, we do not intend to foreclose the bank's opportunity for effective determination of allegations made by the bank in the show cause notice. Hence, the bank would be at liberty to make a proper disclosure of all the material and information based on which the show cause notices wer....