TaxTMI 
TaxTMI 
2024 (2) TMI 1451
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....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 of storage like Cloud. Hence, it was decided to ....
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.... 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 ("TEV") Report. The TEV Report would indicate whether the restructuri....
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....vices 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 Class-B category, MBIL was classified as "Corporate/promoters affected by external fa....
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....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 hearing, which was challenged by the Petitioner before this Court vide W.P. (C) No. 8729 of 2020. The said Writ....
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.... 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 of proof" to decide the validity of event of Wilful Default under the Master Circular, scope of judicial review in administrative action an....
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.... 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 intentional, deliberate and calculated." 52. A bare reading of Clauses 2.1.3(b) and (c) clearly reveals that an event of wilful default can only take place when the "loan amount" lent by the ba....
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....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 defaulters (suit filed accounts) are forwarded to SEBI by RBI and Credit Information Bureau (India) Ltd. (CIBIL) respectively. The following measures should be initiated by the banks and FIs against the wilful defaulters identified as per the definition indicated at paragraph 2.1 abov....
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....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 pertaining to suit filed accounts of Wilful Defaulters on their respective websites. (b) Banks / FIs should, however, submit the quarterly list of wilful defaulters where suits have not been filed only to RBI in the format given in Annex 1. (c) In order to make the current system of banks/FIs reporting names of suit filed accounts a....
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...." 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 borrowing company and its promoter/whole-time director at the relevant time should be examined by a Committee headed by an Executive Director and consisting of two other senior officers of the rank of GM/DGM. (b) If the Committee concludes that an event of wilful default has occurred, it shall issue a Show Cause Notice to the concerned borrower and the promoter/whole-time director and call for their submission....
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....n, 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 Hon"ble Supreme Court in the cases of Sukhwant Singh v. State of Punjab, Subramanian Swamy v. Union of India and Om Prakash Chautala v. Kanwar Bhan are noteworthy in this regard." 52. While dealing with the standard of proof to decide the validity of an event of Wilful Default under Master Circular in paragraph nos.65 to 69, it was concluded that in the test of validity of civil action on preponderance of probability, the graver the consequences of such civil action, the higher is th....
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....t 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 requires the borrower to submit a Flash Report to the lender banks making the restructuring proposal. Wherever necessary, the lender banks would obtain a TEV Report to ascertain the viability of the company. The CDR Master Circular also requires the lender banks to change the management of the company where there has been "diversion of funds". In case of "diversion of funds", wherever necessary, the banks may also carry out forensic audit of the company. Clause 3 of the CDR Master Circular reads as under: - "3. S....
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....d 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 for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. (iv) 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 by him or it for the purpose of securing a term loan without the knowledge of the bank/ lender." 75. The aforesaid definition of wilful default in RBI's guidelines issued on 2.7.2012 is identical to the definition of wilful default as defined in the Master Circular in quest....
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....h 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 7.3, "Referring Institution should incorporate all applicable standard terms and conditions in the restructuring package, besides special conditions deemed necessary in specific cases..." Annexure IV in paragraph A (1) to (28), provides standard conditions for all four category of borrowers. 83. Paragraph B imposes "Additional Conditions for Borrower Class - "B" (In addition to Standard Conditions Stipulated Under A)". Paragraph C imposes "Additional conditions for Borrower Class - "C" (In addition to Standard Conditions Stipulated Under A & B)". Paragraph D imposes "Additional conditions for Borrower Class - "D" (In addition to Standard Conditions Stipulated under A, B & C)". Thus, the lower the Class....
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.... 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 declare a person as a Wilful Defaulter, lender banks have to independently find that the "Wilful Default" is "intentional, deliberate and calculated" and the said conclusion must be based on "objective facts and circumstances of the case". The Forensic Audit Report can act as a piece of corroboration for the said exercise, but not the sole basis. The lender banks must record their satisfaction of commission of Wilful Default which according to them are "intentional, deliberate and calculated". 58. Further, under Clause 2.1.3 of the Master Circular, the lender banks have to keep in mind the track record of the borrower. The decision to declare an entity or person as Wilful Defaulter cannot be taken on the basis of isolated transactions/incidents. A sim....
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....espondent 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 to MBSL, stating that in the balance sheet of MBSL, it is shown that the MBSL has made investment in Helios Photovoltaic Ltd. (earlier known as MBPV). The Respondent Bank sought the details of such investment from MBSL. MBSL through its email dated 7.10.2009, provided the said details of investment in Helios Photovoltaic Ltd. to the Respondent Bank. 64. Further, prior to the admission of MBSL in the CDR Scheme, MBSL had submitted its Flash Report in 2012 to the lender banks, which also disclosed the investments made in Helios Photovoltaic Ltd. 65. Even during the consideration of the CDR Scheme, the lender banks had a JLM meeting on 10.10.2012. In the said meeting, the representative of PNB Investments Services Ltd., which conducted the Economic Viability Assessme....
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....cted 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 matter, it is difficult to accept the Respondent Bank's argument that the investment in Helios Photovoltaic Ltd. amounts to diversion of funds. It is evident that the Respondent Bank was aware of the investments, found the same to be strategic and required MBSL to retain them. 70. Thus, after having complete knowledge of the investments and treating them to be strategic, which were required to be retained, the Respondent Bank, after eight years, cannot be permitted to do a volte face and hold that the said investment amounted to diversion of funds. 71. The aforesaid finding is further substantiated by the Respondent Bank's own pleading in the Counter Affidavit which states:- "23... It is reiterated that while the Respondent Bank was aware of the investments during the process of CDR, the fact relating to mismanagement and huge diversio....
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.... 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 to be contended that since MBSL did not bring back the investment, the same constitutes an act of Wilful Default. Such a stand cannot be countenanced. 75. The lender banks must follow the mandate of Clause 2.1.3 read with Clause 2.5 of the Master Circular and independently find the acts of "Wilful Default" which are "intentional, deliberate and calculated" and the said conclusion should be based on "objective facts and circumstances of the case". Under the Master Circular, transferring funds in the subsidiary may amount to Wilful Default, if the same is found to be "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, which itself has not drawn any conclusion of diversion of funds, the decision to declare Wilful Defaulter is highl....
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....e 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 attributed to the Petitioner. In the event, the said trading transactions were alleged to be prior to the exit, the same were duly reflected in the financial statements of MBSL and the Respondent Bank had access to the financial statements and balance sheets of MBSL, at all times. 80. Further, at the time of finalization of the CDR Scheme, the lender banks including the Respondent Bank had TEV Report of MBSL from Feedback Infra; Economic Viability Assessment from PNB Investments Services Ltd. and Stock Audit from M/s Mehrotra and Mehrotra, Chartered Accountants. After considering the said documents, the lender banks placed MBSL in Class-B as per the CDR Master Circular. In the Class-B category, MBIL was classified as "Corporate/promoters affected by external factors and also having weak resources, inadequate vision and not having support of professional management." The Class....
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....ld 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, which itself has not drawn any conclusion of diversion of funds. 86. Learned counsel for the Respondent Bank has made huge emphasis on the point that when MBSL was about to default in its loan repayment obligations, the Petitioner exited the said company making an easy escape. This Court is unimpressed with the said argument. Resignation from the company is a legal right of every Director. In this case, the Petitioner resigned from MBSL and submitted Form-32 with the RoC. MBSL informed the lender banks also about the resignation of Petitioner from MBSL. When MBSL was about to default in its loan repayment obligations, MBSL informed the lender banks to consider the CDR package on the assumption that the Petitioner was no longer associated with MBSL and his personal guarantee was not available. On 20.9.2013, the CDR-EG noted that the lender banks have agreed to substitution of person....
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....very 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 stretch of imagination can such a report be conclusive proof of the allegations against the petitioners." 89. This Court is inclined to agree with the aforesaid proposition of law. Even under the Indian Evidence Act, 1872, the opinion of an expert witness under Section 45 is not a conclusive proof. It is subject to cross examination and the opinion and conclusions of an expert are subject to challenge. In the present scheme of things, the Master Circular casts a specific obligation on the Respondent Bank to act independently and objectively under Clause 2.1.3 read with Clause 2.5, as discussed above. It would, therefore, be unsafe if lender banks start to declare borrowers as Wilful Defaulter merely on the basis of observations made in Forensic Audit Report without there being an independent application of mind. The lender banks must follow the mandate of Clause 2.1.3 read with Clause 2.5 of the Master Cir....
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....r 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 efficiency crystalline silicon cell with annual capacity of 90 MW. The cost of this project was Rs. 624.69 Crores. The company demonstrated strong EPC capabilities and quality manufacturing. It has commissioned more than 50 PV projects in India and Germany. The company has significant customer base in Europe, Asia, Pacific, Middle East and the US. 93. The FRS noted that 2011-12 onwards, the company's financial operations were adversely affected due to (a) global solar photovoltaic market was operating under stress due to huge supply addition from China; (b) China offering USD 43 billion subsidy to its domestic companies, which led to abnormal fall in the prices of solar cell. The company, however, has been able to service its debt till 31.12.2011. The CDR-EG had admitted MBSL in Class-B as per the CDR Master Circular, which applies where MBSL was classified as Class-B borrower under the CDR Scheme, which has Clas....
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....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 aforesaid provisions in the CDR scheme leads to the conclusion that the categorization of a borrower in one of the categories between A and D has to be based on an objective satisfaction. 101. This Court is of the view that it is incumbent upon banks who are dealing with public funds and discharging a public duty to make appropriate enquiries as to whether a borrower is in genuine financial difficulty or whether there exists events of fraud and malfeasance. If the lender banks find fraud or malfeasance, the CDR-EG must either refuse CDR completely or impose such additional onerous conditions as provided in the CDR Scheme itself. 102. In the present case, the lender banks were fully aware of all the transactions, which are now alleged to be acts of Wilful Default. This fact is part of the documents leading to the finalization of the CDR scheme. Despite noting all transactions, financial statements, balance sheets, TEV Report and....