TaxTMI 
TaxTMI 
2024 (2) TMI 1451
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....stated that the Petitioner is the Chairman of Hindustan Power Projects Pvt. Ltd., which runs a 1200 mega-watt power plant and supplies electricity to three States namely, U.P., M.P. and Haryana. The Petitioner's company has availed loan facilities amounting to thousands of crores from various banks and it is stated that there has never been any default in servicing the debt since inception. 3. However, the Respondent Bank sought to declare the Petitioner as a Wilful Defaulter with respect to his association in another company known as Moser Baer Solar Ltd. ("MBSL") under the Master Circular, thereby, depriving the Petitioner from availing credit facilities for his present and prospective business enterprises. 4. It is stated that, another company namely, Moser Baer India Limited ("MBIL") was a company incorporated in 1983 by the father of the Petitioner to manufacture storage discs. MBIL exported discs to large multinational companies like Sony, Hitachi, TDK, Fuji, Mitsubishi etc. 5. As per the case of the petitioner, around the year 2005, it was realized that the business of storage discs began to slow down due to the technological advancement and emergence of new mediums....
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....te with the business of MBSL. 13. It is further submitted that in 2010, pursuant to a family arrangement, the Petitioner transferred his entire shareholding in MBSL to his father and completely dissociated himself with the day to day working of MBSL. 14. On 30.4.2012, the Petitioner resigned as the Executive Director of MBSL and Form-32 to that effect was filed with the Registrar of Companies ("RoC"). The Petitioner, on 16.11.2022, completely exited MBSL, when he resigned as whole time Director of MBSL and Form-32 to that effect was filed with the RoC. 15. It is submitted by the Petitioner that as MBSL faced financial decline and there was a looming threat of loan repayment default, the lenders, including the Respondent Bank, considered MBSL's case for Corporate Debt Restructuring ("CDR") in accordance with the CDR Master Circular ("CDR Master Circular") issued by the RBI. To ascertain the sustainability of CDR, the lenders required MBSL to submit a Flash Report, which would present the reasons for its decline, its viability and plan for revival. The said Flash Report would then be forwarded by the lenders to an independent agency for obtaining a Techno Economic Viability ....
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.... MBSL from Feedback Infra; Economic Viability Assessment from PNB Investments Services Ltd. and Stock Audit Report dated 29.8.2012 from M/s Mehrotra and Mehrotra, Chartered Accountants of MBSL. The representative of Feedback Infra, which conducted the Technical Viability Study of MBSL stated that the demand for solar panels was increasing substantially, both nationally as well as internationally. With the anticipated anti-dumping duties on Chinese companies, the viability of MBSL would improve. It was suggested that the core strategy and operating plans of MBSL are technically feasible. 22. The lender banks, thereafter, issued a Final Restructuring Scheme ("FRS") of MBSL. On 21.1.2013, the lender banks further issued a modified FRS in respect of MBSL. 23. On 18.3.2013, the CDR-Cell issued a letter stating that on 21.1.2013, the CDR-EG has approved the proposed restructuring package of MBSL. The Punjab National Bank was appointed as the Monitoring Institution, leading the CDR process along with other consortium banks. The details of approved package were outlined in Annexure-1. MBSL was classified as Class-B borrower under the CDR Scheme, which has Classes from A to D. In the ....
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....oner under the Master Circular alleging that it was proposed to classify him as Wilful Defaulter under the Master Circular as MBSL defaulted to meet its loan repayment obligations. It was alleged that MBSL has diverted funds on the basis of four allegations levelled in the said Show Cause Notice. 33. On 30.3.2020, the Petitioner submitted a reply stating that he was neither the Director nor shareholder of MBSL. It was stated that the Show Cause Notice was issued belatedly i.e., eight years after the Petitioner ceased to be Director of MBSL. The Respondent Bank had not provided the necessary relied upon documents to the Petitioner. Hence, the Show Cause Notice deserved to be withdrawn. 34. Subsequently, the Petitioner, on 30.7.2020, again received the same Show Cause Notice dated 13.3.2020. 35. On 12.8.2020, the Petitioner sent another reply to the Respondent Bank reiterating that he did not hold any position in MBSL since 16.11.2012. The relied upon documents are yet to be provided by the Respondent Bank. The Respondent Bank was again requested to withdraw the Show Cause Notice. 36. The Respondent Bank, on 31.10.2020, issued a letter to the Petitioner for personal heari....
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....ew Committee of the Respondent Bank, however, rejected the said representation and by the impugned order dated 23.3.2023, confirmed the order dated 19.8.2022 passed by the Identification Committee, thereby confirming its declaration of the Petitioner as Wilful Defaulter. The Review Committee also confirmed allegation Nos. 3 and 4 as acts of Wilful Default. 47. Against the aforesaid impugned order, the present Writ Petition has been filed. This Court vide interim order dated 29.3.2023 stayed the operation of the impugned order. 48. I have heard Mr. Dayan Krishnan, learned Senior Counsel appearing for the Petitioner along with Mr. Vaibhav Mishra, Mr. Karan Batura, Mr. Ekansh Mishra and Mr. Jayant Chawla, Advocates and Mr. Chinmoy Pradip Sharma, learned Senior Counsel appearing for the Respondent Bank alongwith Mr. Kush Sharma, Standing Counsel and Mr. Nishchaya Nigam, Advocate, at length, and perused the record. Relevant discussion in W.P. (C) No. 4181/2023 49. This Court in W.P. (C) No. 4181/2023 titled as Ratul Puri v. Bank of Baroda, has extensively dealt with the scheme of RBI's Master Circular for declaring a person as "Wilful Defaulter", "standard o....
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....) The unit has defaulted in meeting its payment / repayment obligations to the lender even when it has the capacity to honour the said obligations. (b) The unit has defaulted in meeting its payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. (c) The unit has defaulted in meeting its payment / repayment 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 off or removed the movable fixed assets or immovable property given for the purpose of securing a term loan without the knowledge of the bank /lender. The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorised as wilful must be i....
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....ed on "objective facts and circumstances of the case." 55. Clause 2.5 of the Master Circular provides for initiation of penal measures against the persons or entities declared as wilful defaulter under Clause 2.1.3 of the Master Circular, which includes non-grant of additional loan facility by any bank or financial institution in the future; debarring them from floating new venture for a period of five years from the date of removal of name as wilful defaulter; initiation of criminal proceedings; change of management of borrower unit; non-induction of the person in the Board of the company etc. The last part of Clause 2.5 places a specific obligation on the banks to put in place a transparent mechanism so that the penal provisions of the said clause are not misused and the scope of such discretionary exercise of power is kept to a bare minimum. Solitary or isolated incidents are not to be used for the use of penal action under the said clause. Clause 2.5 reads as under: "2.5 Penal measures In order to prevent the access to the capital markets by the wilful defaulters, a copy of the list of wilful defaulters (non-suit filed accounts) and list of wilful def....
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....he list of wilful defaulters available to banks and financial institutions on real time basis and dissuade them from grant of credit facility to such persons and entities. Clause 2.9 reads as under: "2.9 Reporting to RBI / Credit Information Companies (a) Banks/FIs should submit the list of suit-filed accounts of wilful defaulters of Rs. 25 lakh and above as at end-March, June, September and December every year to a credit information company which has obtained certificate of registration from RBI in terms of Section 5 of the Credit Information Companies (Regulation) Act, 2005 and of which it is a member. Reserve Bank of India has, in exercise of the powers conferred by the Act and the Rules and Regulations framed thereunder, granted Certificate of Registration to (i) Experian Credit Information Company of India Private Limited, (ii) Equifax Credit Information Services Private Limited, (iii) CRIF High Mark Credit Information Services Private Limited and (iv) Credit Information Bureau (India) Limited (CIBIL) to commence/carry on the business of credit information. Credit Information Companies (CICs) have also been advised to disseminate the information pertain....
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....a show cause notice to the concerned unit or person calling for his response. After consideration of the response, a final order recording the event of wilful default, or otherwise, may be issued alongwith the reasons for the same. Wherever the Committee considers necessary, an opportunity of personal hearing should also be granted. This Committee is called as the "Identification Committee." 58. The order of the Identification Committee shall be reviewed by another Committee headed by the Chairman/MD/CEO and two other independent/non-Executive Directors of the bank. The order declaring a person as wilful defaulter shall become final only after it is confirmed by this Review Committee. The said clause also provides that under Section 2(60) of the Companies Act, 2013, an officer who is in "default" to mean only "whole time director" unless the case falls in the category of exceptions enumerated in the said clause. Clause 3 reads as under: - "3. Mechanism for identification of Wilful Defaulters The transparent mechanism referred to in paragraph 2.5(d) above should generally include the following: (a) The evidence of wilful default on the part of the....
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.... (c) above should be followed when identifying a nonpromoter/non-whole time director as a wilful defaulter." 59. Clause 4.2(iii) also provides for initiation of criminal proceedings against declared wilful defaulters, wherever necessary." 51. In terms of paragraph nos.60 to 64, this Court has made a reference to the consequences of a person or entity being declared as a Wilful Defaulter and held that the said declaration also affects the right to reputation of a person, which is also a fundamental right flowing from Article 21 of the Constitution. The concluding paragraph of the said discussion reads as under:- "64. As held by the Hon"ble Supreme Court, the declaration of a person as wilful defaulter and barring him from credit facility in the future have civil and penal consequences, which also have the effect of adversely affecting his reputation. Thus, the declaration of a person as wilful defaulter, apart from adversely affecting the fundamental rights guaranteed under Article 19(1)(g) of the Constitution, also affects the right to reputation of a person, which is also a fundamental right guaranteed under Article 21 of the Constitution. The decisions of the....
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....o important to discuss the scope of judicial review in administrative action. The Hon"ble Supreme Court in the case of Rajesh Agarwal (supra) has held that the act of declaring a person as wilful defaulter or fraud is in the nature of administrative action. The scope of judicial review on administrative action is well defined. It is not necessary to discuss judicial decisions in detail except to note a recent decision of the Hon"ble Supreme Court in Mohd. Mustafa (supra), wherein, it was reiterated that if the discretionary power has been exercised in disregard of relevant consideration, the Court would hold the action bad in law. If the relevant, germane and valid considerations are ignored or overlooked by an executive authority while taking a decision, the same would fail to withstand judicial scrutiny. The relevant observations are as under: - ***" 54. The scheme of CDR, as discussed in paragraph nos.71 to 89, is reproduced as under:- "71. The RBI has framed the CDR Master Circular enabling the lender banks to prepare a CDR scheme in respect of a business entity, which is struggling in meeting its existing loan repayment obligations. The CDR Master Circular....
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....ulters etc. are given in Annexure III." 73. Clause 6.3 specifically requires the Core Group of banks to "ensure that cases involving frauds or diversion of funds with mala fide intent are not covered." The said clause further provides that the "details of eligibility criteria to be followed in respect of cases of wilful defaulters etc. are given in Annexure III." 74. Annexure III, which relates to "Cases of Wilful Defaulters: Eligibility Criteria, Financial Viability Parameters Procedural Aspects" thereof makes reference to RBI's guidelines issued on 2.7.2012, which define "wilful default" as: "(i) The unit has defaulted in meeting its payment/ repayment obligations to the lender even when it has the capacity to honour the said obligations. (ii) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has not utilized the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. (iii) The unit has defaulted in meeting its payment/ repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilized ....
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....rticipating lenders. Based on experience and various features of the borrower-corporate and their promoters/sponsors, the borrower-corporate are categorized into four Classes for the purpose of stipulation of standard terms & conditions under the CDR Mechanism. The classification is as under: Borrower Class 'A': Corporate affected by external factors pertaining economy and Industry. Borrower Class 'B': Corporate/promoters affected by external factors and also having weak resources, inadequate vision, and not having support of professional management. Borrower Class 'C': Over-ambitious promoters; and borrower-corporate which diverted funds to related/unrelated fields with/without lenders' permission. Borrower Class 'D': Financially undisciplined borrower-corporate." 81. Clause 7.2 provides that: "The classification of each borrower-corporate shall be decided at the meeting of the CDR Empowered Group (EG) whereat the Financial Restructuring Proposal is approved. The standard terms and conditions applicable to different classes of borrowers are set out in Annexure-IV." 82. As per Clause ....
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....tisfaction to issue Show Cause Notice in the instant case 55. Keeping in mind the principles laid down by this Court in the final order in W.P. (C) No. 4181/2023 titled as Ratul Puri v. Bank of Baroda, the facts of the case in hand deserves to be analysed. 56. This Court, vide order dated 28.11.2023, had directed the Respondent Bank to place on record the document which showed the satisfaction arrived at by the Respondent Bank to issue Show Cause Notice to the Petitioner. The Respondent Bank filed Minutes of Meeting dated 24.2.2020, wherein, the decision to issue Show Cause Notice to the Petitioner was taken. In a chart relating to MBSL, the Respondent Bank has referred to the four allegations in the Show Cause Notice and in the column of documentary evidence for the allegations, it is mentioned Forensic Audit Report of M/s Haribhakti & Co. LLP. It is thus evident that the Respondent Bank has issued Show Cause Notice to the Petitioner only by referring to the observations made in the Forensic Audit Report. This Court is of the view that this approach of the Respondent Bank is not in conformity with the scheme of the Master Circular. 57. Under the Master Circular, to ....
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....r banks. The lender banks cannot allege these investments to be act of Wilful Default several years later. It is contended that Helios Photovoltaic Ltd. was a strategic investment made by MBSL for manufacturing and supply of PV cells, which was a critical component for MBSL in its assembly line of solar cells. 62. The Petitioner further contends that the investments made by MBSL in Helios Photovoltaic Ltd. were duly reflected in the financial statements and audited balance sheets of MBSL. The lender banks including the Respondent Bank, by virtue of the terms of loan approvals provided to MBSL since September 2007, always had access to the financial statements and audited balance sheets of MBSL and were fully aware of the investments. It is contended that the Respondent Bank had full access to inspect and review MBSL's books of accounts and in fact it did so, as otherwise loan facilities to MBSL would not have been renewed year after year in favour of MBSL. It is also contended that the Respondent Bank was a common lender in all of the group companies i.e., MBIL, MBSL and HPVL. 63. Reliance is placed on a letter sent vide email dated 6.10.2008, written by the Respondent Bank t....
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....2. a) Cash Loss b) Repayment of Term Loan of Rs. 112 crore c) Funding of Fixed Assets (net of term loans and equity for capex infused during FR 2009-10 to FY 2011-12 of Rs. 169 crore and d) Investments in wholly owned subsidiary - MBPV Investments: The investments are towards equity and preference share capital in 100% fully owned subsidiary MBPV. These investments are required to be retained in terms of non-disposal undertaking executed with secured lenders of MBPV. Further, investment in MBPV is strategic investment, whereby MBPV supplies PV cells to MBSL in its assembly of modules." 68. After noting the investments made by MBSL in Helios Photovoltaic Ltd., the lender banks placed MBSL in Class-B borrower under the CDR Master Circular, which applies where a company is affected by external factors and not Class-C, which applies for diversion of funds. The lender banks, therefore, did not treat the investment in Helios Photovoltaic Ltd. as diversion of funds at any stage. On the contrary, the lender banks found the investment to be "strategic" and required MBSL to retain the said investment. 69. In this view of the matt....
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....e Report has not drawn any conclusion owing to inadequacy of documents. It has not made any conclusion or finding of diversion of funds. 74. Another argument advanced by the Respondent Bank, as is evident from paragraph no.19 of its Counter Affidavit, is that it became aware of the diversion of funds only from the Forensic Audit Report. MBSL made investments in Helios Photovoltaic Ltd. and did not bring the investments back into the company despite the distress. This submission, again, is made contrary to the lender banks' own stand in the documents leading to the CDR package. In the letter dated 18.3.2013, which approved the restructuring package of MBSL, the lender banks required MBSL to retain the investment. In the FRS, the lender banks again noted that investment in the subsidiary was required to be retained and that the investment by MBSL in Helios Photovoltaic Ltd. was a strategic investment. Even in Clause 4.3.5 of MRA dated 28.3.2013, the lender banks, which included the Respondent Bank, restricted MBSL from selling its investments in HPVL. On one hand, the lender banks are requiring MBSL to retain the investment as a condition of CDR package, whereas, it is now sought ....
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....ely. 78. During the course of arguments, this Court had requested learned counsel for the Respondent Bank to explain this allegation as an act of Wilful Default. Learned counsel has taken this Court through the Unusual Indicator column in the Forensic Audit Report and referred to the trading between MBSL and M/s Helios Photo Voltaic Ltd. as unusual, the two being related party. He stated that the same argument is stated in his Counter Affidavit as well in paragraph no.18 recording - "18... Further, other trading activities have been pointed out between HPVL and the Company." Secondly, he has drawn the attention of this Court to the conclusion drawn by the Forensic Audit report that the Forensic Auditor was unable to verify actual movement of goods against these purchase and sale transaction with M/s Helios Photo Voltaic Ltd. 79. Learned Senior Counsel for the Petitioner submits that the Forensic Audit Report does not specify the period of trading transactions between MBSL and M/s Helios Photo Voltaic Ltd. In the event, the said trading transactions refer to period post 16.11.2012 i.e., when the Petitioner ceased to hold any position in MBSL, then no fault can be attr....
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.... Helios Photo Voltaic Ltd. are at a distance of 50 meters and controlled by the custom officials. Since the goods are to be moved at a distance of 50 meters, no lorries are deployed. It is for this reason that the Forensic Auditor, due to non-availability of supporting documents was unable to verify actual movement of goods. 84. This Court has also perused the Forensic Audit Report in this regard. In the conclusion, it observes - "Due to non-availability of any supporting documents, we are unable to verify actual payment of goods against these purchase and sale transaction with HPVL." The Forensic Audit Report is, therefore, inconclusive and does not record any definite finding of diversion of funds. The Respondent Bank has merely quoted a part of the Forensic Audit Report and gave a finding of diversion of funds without any supporting material, which is inappropriate. 85. As held above, under the Master Circular, a lender bank has to record a finding of an act of Default to be Wilful if the same is "intentional, deliberate and calculated" on objective assessment of facts and circumstances. However, the said burden is not discharged by merely quoting the Forensic Audit Report....
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....re of Forensic Audit Report in respect of a company is discussed by the Calcutta High Court in Prashant Bothra & Anr. v. Bureau of Immigration & Ors. [2023 SCC OnLine Cal 2643] It was held that a Forensic Audit Report, at best, is a piece of evidence in liquidation proceedings and is in no manner a conclusive proof of any illegality committed under a law. The Forensic Audit Report is merely an opinion of the author, which is based on several disclaimers. The Forensic Audit Report cannot be conclusive proof of its observations. The relevant observations are as under:- "21. The very premise of the request was a forensic audit report allegedly authored by a particular concern. The said report, at best, is a piece of evidence in the liquidation proceeding and is in no manner conclusive proof of evidence of any illegality committed by any entity. In fact, it is common experience that each and every such forensic audit report contains several disclaimers, restricting the operation of the same to the proceeding in which they are filed, as well as confined to the impression of the authors thereof on the basis of the documents which are available to them. 22. Under no stre....
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....f the business enterprise but made a concerted effort to divert borrowed funds. The Master Circular assumes that where the track record of the borrower is otherwise sound, then isolated transactions or incidents that may not be financially prudent, may not, alone be sufficient to declare a borrower as Wilful Defaulter. 91. Let us now consider the track record of MBSL as per the FRS, which is an internal document prepared by the Respondent Bank before finalizing the CDR package. The FRS was prepared when MBSL was already in financial constraints and was unable to meet its loan repayment obligations. 92. In the FRS, the lender banks have noted that MBSL is a subsidiary of MBIL and engaged in the manufacturing of photovoltaic cells. The company used the SEZ Unit in Greater Noida to design, manufacture, sell, export photovoltaic cells in the global market. It had a production capacity of 90 MW selective emitter crystalline cells, 50 MW crystalline modules and 40 MW Thin Films PV. The company began its commercial operations at an initial cost of Rs. 439.21 Crores. In 2011, the company consolidated and set up project for advanced high performance selective emitter high efficie....
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....nsactions/incidents. Consequences of admitting MBSL for CDR under the CDR Scheme 97. On considering the manner in which the scheme of CDR Master Circular is to be implemented, it is seen that CDR Master Circular is equipped with several measures to ensure that cases involving frauds or diversion of funds with mala fide intent are not admitted for CDR. 98. These include provisions like Clause 6.3 read with paragraph no.4 of Annexure III, which renders corporates indulging in fraud and malfeasance as ineligible for CDR. Further, CDR scheme provides for four Classes - A to D, out of which, Categories C and D relate to cases of diversion of funds and the said categorisation has to be done by the lenders on their own. 99. The classification has a direct bearing on eligibility as also the conditions to be imposed upon the borrower. The lower the category the more stringent the conditions to be imposed upon a borrower in accordance with paragraphs C and D of Annexure IV. Significantly, "Before CDR Reference/Approval", Clause 3.3 of CDR Scheme expressly empowers banks to commission a Forensic Audit "wherever necessary and specially in cases of diversion of funds". 100. The a....