TaxTMI 
TaxTMI 
2024 (2) TMI 1576
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...." ("Master Circular"), issued by the Reserve Bank of India ("RBI"), was confirmed. FACTS OF THE CASE 2. It is 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, Uttar Pradesh, Madhya Pradesh and Haryana. Petitioner's company has availed loan facilities amounting to thousands of crores and it is stated that there has never been any default in servicing the debt since inception. 3. However, it is alleged that the respondent-Bank sought to declare the petitioner as a wilful defaulter with respect to his association in another company known as Moser Baer India Ltd. ("MBIL") under the Master Circular, thereby, depriving the petitioner from availing credit facilities for his present and prospective business enterprises. 4. It is stated that MBIL was founded in 1983 by the father of the petitioner namely, Mr. Deepak Puri. MBIL diversified into manufacturing of floppy diskettes, CDs and DVDs. Between 1993 to 2005, it was the second largest disk manufacturer in the world. During 2000-2004, Warburg Pincus Group ("WPG") invested in MBIL and a Shareholder's Agreem....
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....It is stated that while the petitioner had stopped being actively involved in the Moser Baer group of companies, he continued to remain a Director on the Board in MBIL in view of the condition incorporated in the Shareholder's Agreement with WPG. 10. As the profits of MBIL started to decline and there was a looming threat of loan repayment default, lenders of MBIL found MBIL's case fit for admission for restructuring and accordingly, a meeting of all the lenders was held, called as Joint Lenders Meet ("JLM") on 3.2.2012, wherein, all the lender banks of MBIL including the respondent-Bank participated. In the said meeting, the MBIL representative gave a financial summary and stated that considering the precarious financial condition of MBIL, it was difficult to meet the loan obligations. MBIL placed a re-structuring plan to all the lenders. The lenders noted that in case the term debts are not restructured, MBIL would default in meeting its loan re-payment obligations. Hence, it was considered appropriate that MBIL be admitted for a Corporate Debt Restructuring ("CDR") in accordance with the CDR Master Circular ("CDR Master Circular") issued by the RBI. To ascertain the sustainab....
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.... a shareholder of MBIL and transferred his shareholding to his father. 15. The Flash Report submitted by MBIL was sent by the lender banks to an external agency Ernst & Young for examination, which gave its detailed TEV Report dated 9.6.2012, inter alia, stating that assuming stable business and economic conditions, the MBIL may be considered viable. 16. On 16.6.2012, the RRCA & Associates ("RRCA") also submitted their Stock Audit Report to the lender banks. The RRCA, in its report, concluded that the stock as per records was verified with the physical stock at warehouses and the same was in agreement with the records. 17. On 16.7.2012, MBIL addressed another letter to Central Bank, inter alia, reiterating that the petitioner has exited MBIL and does not participate in the affairs of MBIL. 18. On 20.7.2012, a Joint Lenders Meet ("JLM") was held between all the lender banks including the respondent-Bank. In the said meeting, the MBIL informed the banks that there were constraints in realizing the investments made in its subsidiaries due to the financial stress. Various aspects of the restructuring proposal were discussed in the meeting. 19. After considering the Flash....
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.... petitioner as wilful defaulter under the Master Circular. One of the allegations in the show cause notice was that MBIL had made investments in its subsidiaries. The petitioner gave his reply to the said show cause notice. After considering the same, the SBBJ vide its order dated 19.5.2016, accepted the explanation put forth by the petitioner and dropped the proceedings seeking to declare the petitioner as a wilful defaulter. 27. On 10.10.2016, the lender banks decided to exit from the CDR scheme approved for MBIL on account of failure of the said CDR scheme and inability of MBIL to meet loan repayment obligations. 28. In 2017, one of the financial creditors namely, Alchemist Asset Reconstruction Co. Ltd., filed an application under Section 7 of the Insolvency & Bankruptcy Code, 2016 ("IBC") before the National Company Law Tribunal ("NCLT") seeking to trigger the Corporate Insolvency Resolution Process ("CIRP") of MBIL. The NCLT vide its order dated 14.11.2017, appointed Mr. Anil Kohli as the Interim Resolution Professional. 29. The Resolution Professional appointed by the NCLT directed GSA Associates, Chartered Accountants ("GSA Associates") to conduct a forensic audit o....
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.... the personal hearing, the petitioner, on 4.9.2021, filed his written submissions. In the said written submissions, the petitioner gave his response to each of the six allegations of alleged wilful default enumerated in the show cause notice. With regard to allegation no.1, the petitioner stated that the investments in the subsidiaries were made from the internal accruals of MBIL and not from borrowed funds. The same was disclosed in the audited financial statements to the banks. 37. The petitioner filed Writ Petition (C) No. 12736/2022 before this Court. However, the same was disposed of vide order dated 8.9.2022, in view of the order dated 19.8.2022 passed by the Identification Committee of the respondent-Bank during the pendency of the Writ Petition declaring the petitioner as a wilful defaulter under the Master Circular. This Court granted time to the petitioner to make a representation before the Review Committee against the order dated 19.8.2022, passed by the Identification Committee. 38. In the order dated 19.8.2022, the Identification Committee of the respondent-Bank exonerated the petitioner from alleged acts of wilful default with regard to allegation nos.2 to....
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....me. 42. On 23.3.2023, the Review Committee passed the impugned order confirming the order passed by the Identification Committee and rejected the representation filed by the petitioner. The present Writ Petition has been filed by the petitioner assailing this order dated 23.3.2023, passed by the respondent-Bank. The prayer in the present Writ Petition is as under: "a. Issue a writ/ order/ direction of mandamus and/or certiorari quashing/ setting aside the Order passed by the Review Committee of the Respondent Bank in its meeting held on 23.03.2023 (impugned order), by which order it has arbitrarily, unfairly and unreasonably declared the name of the Petitioner as a Wilful Defaulter; b. Issue a writ/ order/ direction prohibiting the Respondent and or/its servants, agents, assigns and officers and/or anyone claiming through or under them from giving effect and/or further effect and/or taking any steps and/or acting in furtherance of the Review Committee Order dated 23.03.2023, in any manner whatsoever." 43. This Court, after hearing learned counsel for the parties, vide interim order dated 29.3.2023 stayed the operation of the impugned order dated 23.3.2023 as....
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....was made from such internal accruals. The Master Circular can be invoked only in relation to borrowed funds. Since the investments were made from cash surpluses of MBIL, the proceeding under the Master Circular is without jurisdiction; vi. As MBIL faced financial constraints, the lender banks considered the proposal of MBIL for restructuring of debt under the CDR Scheme. The lender banks, including the respondent-Bank, directed MBIL to submit a Flash Report placing on its restructuring proposal. The MBIL gave its Flash Report, in which it was clearly stated that one of the reasons of financial constraints was the inability to unlock the investments made in the subsidiaries. Thus, the lender Banks were fully aware of the investments; vii. The CDR-EG placed MBIL in Class-B under the CDR Master Circular, which does not apply where there is diversion of funds; viii. The CDR-EG obtained a TEV Report from Ernst & Young and a Stock Audit Report from RRCA, which are external independent entities. Based on the Flash Report, TEV Report and the Stock Audit Report, the lender banks issued the FRS. The FRS is an internal document of the lender banks. The respondent-Ba....
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....onomy and Industry"), which is the highest category, provided that MBIL gave a personal guarantee of the petitioner. However, because MBIL could not comply with this condition, it was allowed to retain Class-B. The offer to classify MBIL in Class-A and the eventual decision to retain Class-B, clearly establishes that, as required under the CDR Scheme, the banks including respondent-Bank did not find it necessary to conduct an investigation and analysis into the affairs of MBIL prior to admitting MBIL for a CDR package; xii. Having (i) categorized MBIL as Class-B borrower at the stage of receipt of Flash Report, (ii) confirmed Class-B category for MBIL in the FRS after TEV Report and Stock Audit, (iii) finally admitted MBIL for CDR, (iv) felt no need for a forensic audit either before or during CDR and not even after the CDR failed, makes it clear that the banks did not find any event of fraud or malfeasance or diversion of funds. Otherwise, lender banks would not have admitted MBIL to CDR or have directed a forensic audit, at least, after they exited the CDR. The lender banks are, thus, estopped from contending that they did not have any opportunity to look at events of wi....
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....ABL International Ltd. v. Export Credit Guarantee Corpn. of India Ltd. [(2004) 3 SCC 553], NTPC Ltd. v. Mahesh Dutta [(2009) 8 SCC 339], Popatrao Vyankatrao Patil v. State of Maharashtra [(2020) 19 SCC 241], Real Estate Agencies v. State of Goa [(2012) 12 SCC 170], M.P. Power Management Co. Ltd. v. Sky Power Southeast Solar India (P) Ltd. [(2023) 2 SCC 703], Dewan & Sons Investment Pvt. Ltd. v. NDMC [1996 SCC OnLine Del 781], Radha Raman Samanta v. Bank of India [(2004) 1 SCC 605], Babu Verghese & Ors. v. Bar Counsel of Kerela [(1999) 3 SCC 422], Heinz India (P) Ltd. v. State of U.P. [(2012) 5 SCC 443], M. Siddiq (Ram Janmabhumi Temple- 5J.) v. Suresh Das [(2020) 1 SCC 1], NG Dastane v. S Dastane [(1975) 2 SCC 326], State of UP v. Sheo Shanker Lal Srivastava [(2006) 3 SCC 276], All India Railway Recruitment Board v. K Shyam Kumar [(2010) 6 SCC 614], Aap Infrastructure Ltd. v. Bank of Baroda [2019 SCC OnLine Del 9670], Canara Bank v. P.R.N. Upadhyaya & Ors. [(1998) 6 SCC 526], SBI v. Rajesh Agarwal [(2023) 6 SCC 1], Erusian Equipment & Chemicals Ltd v. State of West Bengal [(1975) 1 SCC 70], Delhi Public School v. Central Board of Secondary Education [2020 SCC OnLine Guj 386], Prash....
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.... Learned counsel placed reliance on the decisions in the cases of Sarvepalli Ramaih v. District Collector, Chittoor & Ors. [(2019) 4 SCC 500], State of UP v. Sheo Shanker Lal Srivastava & Ors. [(2006) 3 SCC 276], V. Ramana v. Andhra Pradesh State Transport Corporation Vishakapatnam & Ors. [2001 SCC Online AP 705], Nitin & Ors. v. IDBI Bank Limited & Ors. [2019 SCC Online Bom 1422], Rajesh Agarwal (supra) and LPA No. 597/2022 of this Court in the case of Kirtilal Ravchandbhai Sanghavi v. Reserve Bank of India & Anr. ANALYSIS Scheme of RBI's Master Circular for declaring a person as "wilful defaulter" 48. Before going into the facts of the case, it is essential to examine the scheme of the Master Circular. In order to put in place a system to disseminate credit information pertaining to wilful defaulters for cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them, the RBI, in exercise of power under Sections 21 and 35A of the Banking Regulation Act, 1949 issued the Master Circular dated 1.7.2015. 49. Originally, a scheme for declaration as wilful defaulter was framed by the RBI in 1999 on the recommendations....
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....t 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 bank is diverted or siphoned off by the borrower, for any use, other than for which the loan was granted. 53. Clause 2.2 of the Master Circular defines "diversion of funds" and "siphoning of funds" as under: "2.2 Diversion and siphoning of funds: The terms "diversion of funds" and "siphoning of funds" should construe to mean the following: - 2.2.1 Diversion of funds, referred to at para 2.1(b) above, would be construed to include any one of the undernoted occurrences: (a) utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction; (b) deploying borrowed funds for purposes / activities or creation of assets other than those for ....
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....er 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 above: a) No additional facilities should be granted by any bank / FI to the listed wilful defaulters. In addition, the entrepreneurs / promoters of companies where banks / FIs have identified siphoning / diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions should be debarred from institutional finance from the scheduled commercial banks, Development Financial Institutions, Government owned NBFCs, investment institutions etc. for floating new ventures for a period of 5 years from the date the name of the wilful defaulter is published in the list of wilful defaulters by the RBI. b) The legal proc....
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....ormation 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 and non-suit filed accounts of Wilful Defaulters and its availability to the banks by CICs / RBI as current as possible, banks / FIs are advised to forward data on wilful defaulters to the CICs/Reserve Bank at the earliest but not later than a month from the reporting date. (d) After examining the recommendations of the Committee to Recommend Data Format for Furnishing of Credit Information to Credit Information Companies (Chairman: Shri. Aditya Puri) it has been decided to implement the following measures with regard to reporting and dissemination of information on wilful defaulters: ....
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.... "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 submissions and after considering their submissions issue an order recording the fact of wilful default and the reasons for the same. An opportunity should be given to the borrower and the promoter/whole-time director for a personal hearing if the Committee feels such an opportunity is necessary. (c) The Order of the Committee should be reviewed by another Committee headed by the Chairman / CEO and MD and consisting, in addition, of two independent directors of the Bank and the Order shall become final only after it is confirmed by the said....
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...., the cycle of diversion/siphoning of borrowed funds; default and reborrowing, leading to same situation may continue. Such a scenario may adversely affect the liquidity of the banking system and affect the overall financial health of the country. There is, thus, no doubt that the Master Circular aims to achieve a very lauded object. Notably, the scheme of the Master Circular indicates that it is both a punitive and preventive measure. 61. However, it needs to be acknowledged that the consequences for an individual or an entity who is declared as wilful defaulter are also drastic. As discussed earlier, such an individual or entity is barred from availing any loan facility in the future; is proscribed from floating new venture; and may face criminal proceedings. Additionally, being labelled as wilful defaulter in public domain also affects the reputation of such individual and entity. Business entities would hesitate to do any business or dealing with someone who is declared as wilful defaulter. The availability of loans from financial institutions is the backbone of doing business. It is not only a mode of raising finance but it is also an indicator of the creditworthiness of th....
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....rcular, 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 Circular dated 1-7-2015." 63. Subsequently, in the case of Rajesh Agarwal (supra), the Hon'ble Supreme Court dealt with another similar Circular issued by the RBI known as the Master Directio....
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....rely of property or personal rights, but also of civil liberties, material deprivations, and nonpecuniary damages. Every order or proceeding which involves civil consequences or adversely affects a citizen should be in accordance with the principles of natural justice. 47. The next question that requires our consideration is whether the classification of a borrower's account as fraudulent under the Master Directions on Frauds entails civil consequences to the borrowers. *** 50.3. The above consequences show that the classification of a borrower's account as fraud under the Master Directions on Frauds has difficult civil consequences for the borrower. The classification of an account as fraud not only results in reporting the fact to investigating agencies, but has other penal and civil consequences as specified in Clauses 8.12.1 and 8.12.3. *** 53. Since the consequences flowing from the two circulars are similar, the observations in Jah Developers on the effect of declaring a borrower as wilful defaulter will be squarely applicable to the present case. *** 55. Classification of the borrower's account as fraud under the....
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....ciples of natural justice would come into play. The Court held that 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 : (SCC p. 606, para 41) "41. It is thus amply clear that one is entitled to have and preserve one's reputation and one also has a right to protect it. 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 violation of the same will have to bear the scrutiny of judicial review." 64. RBI and lender banks have relied on Peerless General Finance & Investment Co. Ltd. v. RBI, Joseph Kuruvilla Vellukunnel v. RBI and Internet & Mobile Assn. of India v. RBI to submit that the Master Directions on Frauds are akin to a statutory regulation and a decision on economic policy, which must be accorded a level of deference. ....
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....n Swamy v. Union of India [(2016) 7 SCC 221] and Om Prakash Chautala v. Kanwar Bhan [(2014) 5 SCC 417] are noteworthy in this regard. "Standard of proof" to decide the validity of event of wilful default under Master Circular 65. As discussed above, since the declaration of a person as wilful defaulter has both civil and penal consequences; it affects the fundamental right to do business under Article 19(1)(g) and affects the right to reputation under Article 21 of the Constitution, the next question that follows is what should be the standard of proof to decide the validity of an event of wilful default under the Master Circular. 66. The proceedings under the Master Circular are civil in nature. Ordinarily, the validity of a civil action is decided on a preponderance of probability. However, it has been laid down by the Hon'ble Supreme Court in the case of Heinz India (P) Ltd. (supra) that the nature of proof within this test varies and depends upon the subject matter. The graver the charge and consequences, the higher the degree of proof required: "43. In England, the civil standard of proof is defined by Lord Denning in Miller v. Minister of Pensions thus: (All....
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....w in England, therefore, is that degree of probability must be commensurate with the subject-matter. This implies that graver the charge in a civil action, higher the degree of proof required. A civil case may be proved by preponderance of probability, but the degree of probability would depend upon the nature of the subject-matter." 67. Subsequently, in the case of M. Siddiq (Ram Janmabhumi Temple-5 J.) (supra), the Constitution Bench of the Hon'ble Supreme Court reiterated that in standard of preponderance of probabilities, there could be different degrees of probability and the degree depends upon the subject matter. The civil action which affects the status of parties requires a closer scrutiny. The relevant observations are as under: "The standard of proof 720. The court in a civil trial applies a standard of proof governed by a preponderance of probabilities. This standard is also described sometimes as a balance of probability or the preponderance of the evidence. Phipson on Evidence formulates the standard succinctly : If therefore, the evidence is such that the court can say "we think it more probable than not", the burden is discharged, but if the pro....
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....ct exists, if on weighing the various probabilities he finds that the preponderance is in favour of the existence of the particular fact. As a prudent man, so the court applies this test for finding whether a fact in issue can be said to be proved. The first step in this process is to fix the probabilities, the second to weigh them, though the two may often intermingle. The impossible is weeded out at the first stage, the improbable at the second. Within the wide range of probabilities the court has often a difficult choice to make but it is this choice which ultimately determines where the preponderance of probabilities lies. Important issues like those which affect the status of parties demand a closer scrutiny than those like the loan on a promissory note: "the nature and gravity of an issue necessarily determines the manner of attaining reasonable satisfaction of the truth of the issue, CLR at p. 210'; or as said by Lord Denning, "the degree of probability depends on the subject-matter'. In proportion as the offence is grave, so ought the proof to be clear, All ER at p. 536'. But whether the issue is one of cruelty or of a loan on a pronote, the test to apply is whether on a pr....
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....udicial 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 reproduce as under: "15. Judicial review may be defined as a Court's power to review the actions of other branches or levels of Government; especially the Court's power to invalidate legislative and executive actions as being unconstitutional. Power of judicial review is within the domain of the judiciary to determine the legality of administrative action and the validity of le....
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....usceptibility to judicial review under this head covers also failure by an Administrative Tribunal to observe procedural rules that are expressly laid down in the legislative instrument by which its jurisdiction is conferred, even where such failure does not involve any denial of natural justice. But the instant case is not concerned with the proceedings of an Administrative Tribunal at all." 17. The discretionary power vested in an administrative authority is not absolute and unfettered. In Wednesbury, Lord Greene was of the opinion that discretion must be exercised reasonably. Explaining the concept of unreasonableness, Lord Greene stated that a person entrusted with discretion must direct himself properly in law and that he must call his own attention to the matter which he is bound to consider. He observed that the authority must exclude from his consideration matters which are irrelevant to the matter he is to consider. Lord Greene concluded that if an authority does not obey aforementioned rules, he may truly be said, and often is said, to be acting unreasonably. 18. Conditions prompted by extraneous or irrelevant considerations are unreasonable and liable t....
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.... affected due to incompetent management of the Company or where diversion/misuse of funds has taken place, change of management should be the first option. 3.3 Wherever necessary and specially in cases of diversion of funds, forensic audit/ special investigative audit may be got carried out by the MI." 72. Similarly, Clause 6.3 of the CDR Master Circular provides that companies indulging in frauds and malfeasance will remain ineligible for the CDR Scheme. Clause 6.3 reads as under: - "6.3 Wilful Defaulters RBI in its guidelines on CDR mechanism has stipulated as under: While corporate indulging in frauds and malfeasance even in a single bank will continue to remain ineligible for restructuring under CDR mechanism as hitherto, the Core group may review the reasons for classification of the borrower as wilful defaulter specially in old cases where the manner of classification of a borrower as a wilful defaulter was not transparent and satisfy itself that the borrower is in a position to rectify the wilful default provided he is granted an opportunity under the CDR mechanism. Such exceptional cases maybe admitted for restructuring with the approval of the....
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....Grievance Redressal Committee/ Review Committee and finally a decision. 77. Paragraph 4 restates that "Cases of Wilful Defaulter Not Eligible Under CDR". This clarifies again that cases of reported siphoning of funds or misfeasance, fraud etc. are prima facie not eligible to be covered under CDR. 78. Paragraph 5 mandates referring institution to check list of wilful defaulters as maintained by RBI/ CIBIL to verify whether any FI/ bank has reported the company as wilful defaulter and inter alia, report such instances to the CDR-EG. 79. Where a borrower is classified as a wilful defaulter, the core group may review the reasons for such classification and even such exceptional cases may be admitted for CDR, but they are required to undergo a much more onerous and rigorous process before an MRA/ TRA is executed. 80. Clause 7 of the CDR Master Circular enjoins the lender banks to classify the borrowing company in one of the four categories from A to D. Category-C is assigned where there is diversion of funds by the company: "7. BORROWER CLASSIFICATION FOR STIPULATION OF STANDARD TERMS AND CONDITIONS 7.1 It is observed that borrower - Corporate get ....
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....er giving reasonable notice, to the Lenders and to the Eligible Borrower." 85. As defined in Clause 8.3, "Super-Majority Vote" means not less than 60 per cent of number of lenders holding not less than 75 per cent of aggregate Principle Outstanding Financial Assistance. 86. On admission of Flash Report, as per Clause 9.3, "the borrower should open a current account with the MI (Monitoring Institution) to be designated "pre-TRA" account..." and the procedure for which is described in Clauses 9.3 (i) to (xiii). 87. Clause 10 provides for a "Monitoring Mechanism" to ensure success of CDR mechanism and provides for an exhaustive process for proper implementation of the restructuring scheme. Clause 22 provides for criteria and procedure for exit from CDR. 88. After the TEV Report is made by an "independent agency" and an independent auditor conducts a Stock Audit of the company (both appointed by banks/ consortium of banks), the bank/ consortium of banks then commission the preparation of FRS, which is deliberated and approved by the banks and such approved FRS is submitted to the CDREG for its approval. 89. As per Clause 10.9, pursuant to the approval of CDR package by t....
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....tment and transaction." 95. Even otherwise, such a stand is belied by the documents on record. The respondent-Bank had sanctioned loan facilities in favour of MBIL by sanction letters dated 12.12.2006 and 24.4.2010. Both the loan sanction letters required MBIL to submit quarterly statements and audited balance sheets to the respondent-Bank. The investments in the subsidiaries were made by MBIL from 2006 onwards till 2010. The audited financial statements duly reflected the investments in the subsidiaries. It is, therefore, difficult to accept that the respondent-Bank became aware of the investments in subsidiaries, which now according to them, is an act of diversion of funds, only in 2019 after it obtained a copy of the Forensic Audit Report. It is equally difficult to accept that the respondent-Bank did not review the financial statements of MBIL. 96. There are other clear circumstances which establish that the respondent-Bank was aware of these investments. As required by the lender banks, MBIL had submitted its Flash Report dated 18.2.2012. In Clause 13(d) of the said Flash Report, MBIL stated that one of the reasons for the current financial problems was the inability of ....
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....tation prescribed, the power under every enactment must be exercised within reasonable time. What is reasonable time depends upon the facts of each case. When a noticee takes an objection of inordinate delay in issuance of show cause notice, the authority must decide the same in objective manner. This prevents abuse of the power. The relevant paragraph of the said decision reads as under:- "82... The directions given in the aforesaid quotation should not be understood as empowering the authorities/Board to initiate action at any time. In the absence of any period of time and limitation prescribed by the enactment, every authority is to exercise power within a reasonable period. What would be the reasonable period would depend upon facts of each case, such as whether the violation was hidden and camouflaged and thereby the Board or the authorities did not have any knowledge. Though, no hard and fast rules can be laid down in this regard as determination of the question will depend on the facts of each case, the nature of the statute, the rights and liabilities thereunder and other consequences, including prejudice caused and whether third party rights have been created are ....
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....? 103. This brings us back to the primary issue i.e., whether the respondent-Bank has erred in declaring the petitioner as wilful defaulter on the ground that substantial investments were made by MBIL in its subsidiaries, which amounted to diversion of funds within the meaning of Clause 2.1.3(b) and (c) of the Master Circular. 104. Clause 3(a) of the Master Circular places an obligation on the Identification Committee to examine the evidence of wilful default. Clause 3(b) provides that if the Identification Committee "concludes" that an event of wilful default has occurred, it shall issue show cause notice. 105. This Court vide order dated 28.11.2023 had directed the respondent-Bank to place on record the evidence on which the Identification Committee concluded that event of wilful default has occurred warranting issuance of show cause notice. 106. In compliance of the aforesaid direction, the Minutes of Meeting dated 24.2.2020 of the respondent-Bank, was placed on record, which includes the name of MBIL, which is reproduced as under: "After discussions the committee directed to issue show cause notices to the company/firm/borrowers and its directors/ guarantor....
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....merits. The respondent-Bank, on 13.3.2020, had issued the show cause notice to the petitioner as to why he should not be declared as a wilful defaulter under the Master Circular. The show cause notice outlined six allegations of wilful default. The relevant portion of the show cause notice is reproduced as under:- "Re: Show Cause Notice for declaring M/s. Moser Baer India Limited and its Director as Wilful Defaulters and Opportunity for Representation there against. We refer to your captioned account and write to inform you that due to non-payment of interest/instalment, account turned to Nonperforming assets in the books of the Bank on 30.09.2012. We further write to inform you that as per the directions of the Committee of Executives on Wilful Defaulters of our Bank and on scrutiny of your account based on your acts of omission and commission, deeds/ documents and writings, performed /executed by you, the Company and its directors be classified as Wilful defaulter as per guidelines of RBI on the following grounds: 1. MBIL has made substantial investment in subsidiaries and related entities amounting to Rs.1586.75 Cr as on 31.12.13. During the period from 0....
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....586.75 Crores as on 31.12.13. During the period from 01.04.13 to 31.03.15, provision and write off made amounting to Rs. 287.03 Crores. 1. No investments were made from borrowed funds. All investments were made from internal accruals/ PE funds/FCCB and disclosed in audited financial statements during FY 2003-11. 2. Investments were evaluated at the time of sanction of credit facilities on 24.04.2010 and no objections thereof were raised. 3. These were again evaluated during the approval of CDR and were not considered to be an event of wilful default. Rather, same were recognized as strategic investments in the FRS and a Non-disposal Undertaking was obtained by the Lenders. 4. Alleged provisions/ write-off during 01.04.13 to 31.03.15 pertains to the period post my exit in 2012. Hence, it cannot be an event of declaring me a Wilful defaulter Thus, there was no wilful default till my association with MBIL. 112. In the aforesaid written submission, the petitioner submitted its defence with regard to all the six allegations including allegation no.1. With regard to allegation no.1 that - "MBIL has made substantial investments in subsidiaries and related entities amount....
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....ere made. All the said investments were made in 100% subsidiaries of MBIL for which no permission of lender was required. (d) Said investments were made for the businesses related to the business of the MBJL. (iv) Said investments, were also known to the lenders at the time of grant of loans, as same were disclosed in the audited financial statements of MBIL from time to time under the headings, "Note No. J 5 - Non-current Investments" as is evident from relevant Schedule of such financial statements for the F.Y 2009 to 2012. Copies of these audited financial statements were provided to the lenders from time to time as mandated under the terms and conditions of loan related documents and agreements. Even otherwise, aforesaid financial statements, being the public documents, were legally in the knowledge or the lenders. All the lenders had renewed the working capital and/or sanctioned term loans from time to time despite having full knowledge about said investments from time to time, as copies of said audited financial statements were also provided to the lenders during detailed appraisal process of the lenders. (v) The Final Restructuring Scheme (FRS....
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....ing investments and provisions for diminution in value of such investments in its subsidiaries, as is evident from paragraph 5 and 8 of report dated March 05, 2015, of concurrent auditor M/s Malhotra Chopra & Associates, Chartered Accountants for the period of October to December 2014. (xi) To conclude there was no diversion / misuse of borrowed funds for making said investments in subsidiaries and alleged write off / provisions pertains to the period post my exit from MBIL in 2012. Thus, this allegation cannot be a ground to declare me a wilful defaulter." 114. The Identification Committee of the respondent-Bank passed an order dated 19.8.2022 declaring the petitioner as wilful defaulter. The Identification Committee exonerated the petitioner from alleged acts of wilful default with regard to allegation nos.2 to 6 made in the show cause notice. The Identification Committee held that the said allegations pertained to a period after the petitioner ceased to be a Director of MBIL. 115. However, in respect of allegation no.1, the Identification Committee observed that the petitioner was a whole time Director in MBIL. He was in complete control over the said company. Whe....
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....der clause 2.1.3(b) & (C) diversion/siphoning of funds has been observed in the account which is an element of wilful defaulter and hence Committee decided to declare Mrs. Nita Puri and Mr. Ratul Puri director of M/s. Moser Baer India ltd as wilful defaulters. The Company name is dropped from the wilful default process as the Company is under NCLT process. The committee concludes that Mrs. Nita Purl and Mr. Ratul Puri directors of M/s. Moser Baer India Ltd be declared as wilful defaulters. The Committee directs that this order be served upon Mrs. Nita Purl and Mr. Ratul Puri directors of M/s. Moser Baer India Ltd allowing them to file appeal/ represent against the order of COE within 15 days from the receipt of the order and the said representation, if any, be placed before the Review Committee on Wilful Defaulter for their consideration Ordered accordingly." 116. Against the aforesaid order of the Identification Committee, the petitioner, on 22.9.2022, filed a representation before the Review Committee. The petitioner contended that the Identification Committee has committed an error in declaring him a wilful defaulter attributing the investment in su....
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.... by Mr. Ratul Puri have no merit and hence not considered. The Review Committee observed that the COE has concluded that since substantial investments of Rs. 1556.75 Crores were made in subsidiaries and related parties from the account of the company which has triggered shortage of capitals and this action of the company falls in the diversion as per RBI guidelines under Clause 2.1.3(b) & (c) diversion/siphoning of funds has been observed in the account which is an element of wilful defaulter and hence Review Committee confirm the order of COE of declaration of Mrs. Nita Puri and Mr. Ratul Puri director of M/s Moser Baer India Ltd. as wilful defaulters." 118. This Court has already held that the respondent-Bank was aware about the investments in the subsidiaries at all relevant times. Hence, the contention of the respondent-Bank that only after Forensic Audit Report of 2019, it became aware of the alleged event of wilful default, is not acceptable. 119. Now, the question is whether these investments amount to "diversion" and "siphoning" of funds as per Clauses 2.1.3(b) and (c) of the Master Circular. As discussed above, the definition of "diversion of funds" and....
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....t a clear-cut long term plan to strategically invest in the R&D activities and to develop businesses around its core technological and commercial focus areas. In-line with its vision, it began making strategic investments year after year. These investments had been fully funded from the substantial Cash Surpluses generated by the company in earlier years - from FY-06 onwards and partially from FCCB issuance in FY-08. ● At the time of making these investments, the growth potential and expected profitability from its core businesses and these businesses were substantial - as were the access to capital for each of these businesses. No one had expected the unprecedented disruptions all these related businesses had come to face especially in FY-11." 122. Thus, the lender banks including the respondent-Bank, in their own internal document acknowledged that they were fully aware of the investments made by MBIL in its subsidiaries. The investments had substantial potential of high growth and profit. No one expected the unprecedented disruptions. These investments were made by MBIL from its substantial cash surpluses generated in earlier years of FY 2006 and FY 2008. It is....
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....tee dated February 20, 2018 has not been given to the petitioner. Secondly, it is clear that both the Committees have neither considered nor dealt with the stand taken by the petitioner in its reply to the show cause notice. The said Committees or at least the Review Committee was required to refer to the reply and dealt with the same while rejecting the reply of the petitioner to the show cause notice. This would have been in compliance of principles of natural justice as reasons would indicate, application of mind, that too what were the relevant considerations for the authorities to reject the reply of the petitioner to the show cause notice." 126. The Kerala High Court, in similar circumstances, in the case of Ravis Exports v. Union of India [W.P. (C) No. 2427 of 2020], had quashed a wilful defaulter order on the ground that the lender bank failed to consider the explanation offered by the borrower:- "21... The COE had not considered the reasons or explanation offered by the petitioners or their representatives while arriving at the decision in Ext.R4(d). In the communication issued as Ext.P19, the reasons for declaring the petitioners as wilful defaulters have....
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....o.11 has admitted, and which is also borne out from other documents on record, that the lender banks including the respondent-Bank were all along aware of the investments made in the subsidiaries. The provisions of the CDR Master Circular in Clause 3 provide for scrutiny at the stage of CDR. The CDR Master Circular 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. The lender banks including the respondent-Bank neither sought the change of management nor sought the forensic audit. Clause 6 of the CDR Scheme proscribes the banks from entering into CDR where there is fraud or malfeasance. In the FRS, which is banks' own internal document, the respondent-Bank, despite noting investment in subsidiaries, never categorized them as diversion of funds. Thus, the argument of the respondent-Bank, that the petitioner cannot rely on the fact that MBIL was placed in Class-B since at that stage no forensic audit was done, is devoid of any substance. 131. Clause 2.2.2 of the Master Circular requires the banks and its two Comm....
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....lause 2.1.3(b) & (C) diversion/ siphoning of funds..." 135. Learned counsel for the petitioner contended that the aforesaid observation is totally misconceived and ignores the contents of the FRS. In Clause 5.1.2 of the FRS, the lender banks including the respondentBank recognized that the MBIL clearly had a long term plan to strategically make investments in core technologically and commercially focused business. In line of this, MBIL made investments in its subsidiaries. At the time of investment, the growth potential and expected profits were substantial. Subsequent unprecedented disruptions could not have been anticipated.. Further, in Clause 8.1(3), the lender banks had expressly restricted MBIL from selling "any of its fixed assets / investments" "without prior recommendation of the Monitoring Committee and approval of CDR EG". Thus, according to lender banks, the investments at the time when made, were strategic; had growth potential and expected profits. However, when the investments did not yield profits due to various factors, they were subsequently categorized as "diversion/siphoning". Such an approach cannot be countenanced. In any case, since the investments were no....
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....at cost. However, when there is a decline, other than temporary, in the value of a long term investment, the carrying amount is reduced to recognise the decline. Indicators of the value of an investment are obtained by reference to its market value, the investee's assets and results and the expected cash flows from the investment. The type and extent of the investor's stake in the investee are also taken into account. Restrictions on distributions by the investee or on disposal by the investor may affect the value attributed to the investment. 18. Long-term investments are usually of individual importance to the investing enterprise. The carrying amount of long-term investments is therefore determined on an individual investment basis. 19. Where there is a decline, other than temporary, in the carrying amounts of long term investments, the resultant reduction in the carrying amount is charged to the profit and loss statement. The reduction in carrying amount is reversed when there is a rise in the value of the investment, or if the reasons for the reduction no longer exist." 139. Learned counsel for the respondent-Bank is unable to refer to any document on reco....
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....n Companies Act, 2013 permits a Director to resign as the Director of a company. The act of resignation is not an act of wilful default under the Master Circular. The learned counsel for the respondent-Bank is not able to demonstrate to this Court any act of wilful default within the meaning of Master Circular when the petitioner was Director of MBIL. 143. Further, as discussed above, the respondent-Bank was aware about the exit of the petitioner from MBIL. The respondent-Bank carried out the entire CDR proceedings without petitioner's presence in MBIL. It was always open to the respondent-Bank and other members of the consortium banks to refuse CDR if the petitioner's continuation was felt vital. To now contend in hindsight that the petitioner took an easy route to exit MBIL when it was about to default, does not advance the cause of the respondent-Bank in any manner. The mere factum of resignation as the Director, when MBIL was not performing well, cannot be a ground to declare him as wilful defaulter. Contents and effect of Forensic Audit Report 144. This brings this Court to consider the effect of the Forensic Audit Report dated 3.6.2019. As recorded above, this Court,....
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....ent-Bank has tried to justify its show cause notice and orders passed by the Identification Committee and Review Committee on the basis of the Forensic Audit Report. 149. However, a perusal of the Forensic Audit Report, specially Clause D(iv), reveals that the said Report has clarified that the source of funds of investments made in subsidiaries was not verified in the Forensic Audit Report as the same were made prior to the period of review. The relevant portion of Forensic Audit Report is reproduced as under:- "iv. Please further note that source of funds of the investments made by the company in its subsidiaries, associates and joint ventures were not verified by us as these investments were made before our period of review". 150. Thus, the Forensic Audit Report did not verify the source of funds which were invested in the subsidiaries. The respondent-Bank, could not have issued show cause notice to the petitioner for wilful default, without verifying the source of funds that were invested. Unless the funds that were invested were found to be borrowed funds, the respondent-Bank did not have jurisdiction to invoke the Master Circular. The very genesis of "diversion....