TaxTMI 
TaxTMI 
2025 (1) TMI 958
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....ssued by the Wilful Defaulter Committee ('WDC'). 3) The Petitioner is the erstwhile Director of the company known as Bhuwalka Steel Industries Limited ("BSIL"). Pursuant to a resolution of BSIL, under the Insolvency and Bankruptcy Code, 2016 ('IBC'), the company came under the control of a new management. The Petitioner is essentially aggrieved by orders passed by the Respondent No. 1 declaring him as Wilful Defaulter on the basis of a Transaction Audit Report ('TAR') prepared by one M/s. G.D. Apte & Co. at the behest of the erstwhile Resolution Professional ('RP') of BSIL. His main grievance is that he was deprived of a substantial opportunity of being heard inasmuch as the documents on the basis of which a decision to declare him as Wilful Defaulter was taken, were not provided to him and the TAR relied upon by the Respondent No. 1 was held by the NCLT, Bengaluru Bench to be based on surmises and conjectures. 4) The facts of the case reveal that in 2018, a Company Petition (IB) No. 228/BB/2018 was filed by one Indu Corporation Private Limited against BSIL before the NCLT, Bengaluru Bench. The Petition was admitted by the NCLT on 8th April 2019 under the Corporate Insolvency....
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....aff and CA of BSIL were not available to provide data to him. The WDC without waiting for his reply to the SCN nor providing a personal hearing, passed an order dated 14th September 2023 declaring the Petitioner and the co-director as 'Wilful Defaulter'. By e-mail dated 17th October 2023, the Petitioner once again requested the Respondent No. 1 to provide him copies of all the documents/materials on the basis of which the SCN was issued to him by the WDC. According to Mr. Purohit, there was no response to the said e-mail. The Petitioner thus, issued a response dated 28th October 2023 to the SCN without the benefit of supporting documents. 8) Mr. Purohit submits that the Petitioner sought the supporting documents on multiple occasions, but the Respondent No. 1 failed to furnish the same apart from an extract of the TAR provided by e-mail dated 2nd November 2023. The Petitioner, by e-mail dated 20th November 2023 conveyed his objection that the TAR only reflects the opinion of the auditor and does not contain an independent analysis by the Respondents in arriving at the decision to declare the Petitioner as 'Wilful Defaulter'. He reiterated his request for grant of personal hearin....
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.... Glass Ind. Ltd. v. Reserve Bank of India 2009 SCC Online Cal 2112. (e) Vishambhar Saran & Anr. v. CBI & Ors. 2024 SCC Online Cal 4978. (f) State Bank of India & Ors. v. Rajesh Agarwal & Ors. (2023) 6 SCC 1. 12) Per contra, Mr. Prakash Shinde raised a preliminary objection as to the maintainability of the Petition on the ground that the Respondent No. 1 is not 'State' nor an instrumentality of the State within the meaning of Article 12 of the Constitution of India. The Respondent No. 1 is now a private sector bank for regulatory purpose with effect from 21st January 2019. Thus, the present Petition under Article 226 of the Constitution of India is not maintainable. 13) On the merits of the matter, Mr. Shinde says that the suspended directors, including the Petitioner herein were consulted by the RP during the process of preparation of the TAR and were also given sufficient opportunity by the auditors to provide clarifications on their observations on the TAR. Despite repeated requests and reminders, the Petitioner did not offer any clarification. Thus, the RP filed fresh Applications before the NCLT under the provisions of Section 43, 44, 66 and 69 of the IB....
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....Wilful Default'. It reads as thus: "2.1.3 Wilful Default: A 'wilful default' would be deemed to have occurred if any of the following events is noted:- (a) 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 by him or it for the purpose of securing a term loan without the knowledge of the bank/lender." 16) Clause 2.5 of the Master Circular provi....
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.... borrower unit. d) A covenant in the loan agreements with the companies in which the banks/FIs have significant stake, should be incorporated by the banks/FIs to the effect that the borrowing company should not induct on its board a person whose name appears in the list of Wilful Defaulters and that in case, such a person is found to be on its board, it would take expeditious and effective steps for removal of the person from its board. It would be imperative on the part of the banks and FIs to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the barest minimum. It should also be ensured that a solitary or isolated instance is not made the basis for imposing the penal action." 17) Clause 2.9 provides that the RBI under the Credit Information Companies (Regulations) Act, 2015 has granted certificate to four Credit Information Companies. The lender banks should submit a list of wilful defaulters to such Credit Information Companies. This would make the list of wilful defaulters available to banks and financial institutions on real time basis and dissuade them fro....
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....e cases, a non-whole time director should not be considered as a wilful defaulter unless it is conclusively established that I. he was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded in the Minutes of the Board or a Committee of the Board and has not recorded his objection to the same in the Minutes, or, II. the wilful default had taken place with his consent or connivance. A similar process as detailed in sub paras (a) to (c) above should be followed when identifying a non-promoter/non-whole time director as a wilful defaulter." 19) As discussed earlier, the object of the Master Circular is salutary. The Master Circular aims to protect the country's banks and financial institutions from unscrupulous entities and individuals. It is intended to identify and punish those entities and individuals who have diverted or siphoned off borrowed funds for purposes other than for which the loan facility was availed leading to default in the repayment obligations. Such individuals and entities must be identified and their names be published in public domain so that they are barred from availing any further loan facility fr....
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....gations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilised for the specific purpose for which the finance was made available. Whether a default is intentional, deliberate, and calculated is again a question of fact which the lender may put to the borrower in a show-cause notice to elicit the borrower's submissions on the same. However, we are of the view that Article 19 (1) (g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these dra....
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....r the purpose of business. It also entails significant civil consequences as it jeopardises the future of the business of the borrower. Therefore, the principles of natural justice necessitate giving an opportunity of a hearing before debarring the borrower from accessing institutional finance. The action of classifying an account as 'wilful' or 'fraud' not only affects the business and goodwill of the borrower, but also the right to reputation. A decision taken by any authority affecting the right to reputation of an individual has civil consequences. Therefore, in such situations the principles of natural justice would come into play. Any order or decision of the authority adversely affecting the personal reputation of an individual must be taken after following the principles of natural justice. In case any authority in discharge of its duties fastened upon it under the law, travels into the realm of personal reputation adversely affecting him, it must provide a chance to him to have his say in the matter. In such circumstances, right of an individual to have the safeguard of the principles of natural justice before being adversely commented upon is statutorily recognised and vi....
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....BSIL from related/other parties were transferred to SDTI, even though there were amount due from SDTL to BSIL in their direct trading transactions. In Audited Financial Statements for FY2018-19, BSIL made provision of doubtful debts of Rs.75.30 crore including Rs.74.27 crore due from SDTL. BSIL/promoters/directors were enquired on existence of any disputes with SDTL and also between SDTL & its respective customers due to which these dues were not paid by the parties or other reasons for non-payment due to which these dues were provided for in the Financial Statements. However, no information was furnished in these respect by company/promoters/directors. BSIL/Promoters did not inform whether it has taken any tangible efforts for recovery of these receivables from SDTL and also whether any legal actions for recovery of dues is envisaged even though BSIL & SDTL are owned and controlled by common members of Bhuwalka family viz. Shri Ajay Bhuwalka and Shri Ankit Bhuwalka are directors/shareholders in BSIL and SDTL. Receivables were transferred to SDTL even though BSIL, in its direct trading transactions with SDTL, had to receive substantial amounts from SDTL. The transactions betw....
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...., the WDC proceeded to take a decision dated 14th September 2023 to declare the Petitioner as wilful defaulter. The decision was communicated to the Petitioner by letter dated 27th September 2023 and was further called upon to avail a final opportunity to submit any further representation. By email dated 17th October 2023, the Petitioner once again requested for documents but there was no reply. Ultimately he sent a response to the SCN albeit without the benefit or assistance of any documents on the basis of which he was required to explain the findings in the TAR by email dated 28th October 2023. It appears that by email dated 2nd November 2023 the Respondent No. 1 sent an extract of the TAR, which obviously was of no assistance to the Petitioner since the statement of accounts and other documents which formed the basis of the TAR were not provided to him. We are quite perplexed to comprehend the reluctance of the Respondent No. 1 to share the documents with the Petitioner. It is most unreasonable to expect the Petitioner to tender a reasonable clarification/explanation to the TAR and consequently the SCN without having access to the relevant facts and figures. We thus find merit ....
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....ing cannot be construed to be meaningful with the Petitioner having his hands tied behind in the context of the Respondent No. 1 withholding the necessary documents and expecting to offer his comments. 29) In the case of Milind Patel (Supra) this court held that not only must information that is referred to and relied upon in the SCN be supplied but also information that may undermine the allegations contained in the SCN must be supplied only to ensure that everything relevant to arrive at the truth is available to both the parties. The objective of the proceedings initiated by issuance of a SCN is not to somehow find the noticee guilty of wilful default on the terms as alleged. Instead the objective is to arrive at the truth as to whether or not an individual in question is to subjected to 'penal' consequences. Mr. Shinde also placed reliance on the decision of the Apex Court in Jah developers (Supra) but the said decision in fact holds otherwise than his submission and does not assist him any. In any case, we have already discussed the said decision herein above. 30) We now deal with the issue regarding maintainability of the present petition against the Respondent No. 1-Ba....