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Classified as wilful defaulters without furnishing documents is illegal and de hors RBI guidelines

Classified as wilful defaulters without furnishing documents is illegal and de hors RBI guidelines

The Calcutta High Court has passed an order Where Petitioners who were directors and guarantors of company were classified as wilful defaulters by Identification Committee and Review Committee without furnishing documents and information, including a copy of forensic report relied on by both Committees, it was held that Committees violated all norms of natural justice and provisions of RBI Master Circular, 2015 by relying upon such unreliable report which prima facie shows patently illegal and de hors RBI guidelines.


The order was passed by single-judge Bench of Justice Sabyasachi Bhattacharyya on 23 December 2020 in the case of Suresh Kumar Patni v. Punjab National Bank, REED 2020 Cal 8702.


The petitioner nos. 1 and 2 are erstwhile promoters/directors and guarantors of a company named Rohit Ferro Tech Ltd. which is undergoing corporate insolvency resolution process vide order dated February 7, 2020 passed by the National Company Law Tribunal, Kolkata. Petitioner nos. 3, 4, 5 and 7 are erstwhile Independent Directors, petitioner no. 6 an erstwhile Executive Director and petitioner nos. 8 to 12 Corporate Guarantors of the company.


By a letter dated 28 February 2019, show-cause was issued to the petitioners regarding proposed declaration of the petitioners as wilful defaulters under the RBI Master Circular dated 1 July 2015. The petitioners replied to the show-cause notice on 6 June 2019. By way of a letter dated 10 July 2019, the petitioners were informed that the Committee for Identification of Wilful Defaulters (Identification Committee) had classified the petitioners as wilful defaulters on 19 April 2019 and that such decision had been confirmed by a Review Committee. The petitioners, by a letter dated 23 July 2019, refuted the allegations made by the respondents and requested the latter to withdraw and/or cancel and/or revoke the orders of the Committees. The petitioners thereafter moved a writ petition bearing W.P. No. 392 of 2019 before Calcutta High Court, which was disposed of by a co-ordinate Bench on 5 August 2019, whereby it was held that there were procedural irregularities in the decision to classify the account as wilful defaulter. The bank was permitted to initiate proceedings under the Master Circular in respect of the subject account in accordance with law and to communicate the decision of the Identification Committee to the persons responsible in accordance with law.


Subsequently, another show-cause notice dated 5 November 2019 was served on the petitioners, to which the petitioners replied on 22 November 2019. In the said reply, the petitioners denied the allegations made in the notice dated 5 November 2019 and requested the bank to furnish the documents and information, including a copy of the forensic report relied on by both the Committees, to enable the petitioner to give a proper reply. Such documents, however, were not furnished by the bank.


By a communication dated 31 March 2020, the Deputy General Manager of the respondent-bank informed the petitioners that they had been confirmed by the Review Committee as wilful defaulters. Enclosed with such communication was a copy of the order passed by the Review Committee on 6 February 2020 so confirming. The petitioners submitted that they were not informed about the order passed by the Identification Committee at all. Vide letters dated 1 June 2020 and 4 June 2020, the petitioner nos. 8 to 12 and 1 and 2 replied respectively to the letter dated 31 March 2020. Petitioner nos. 3 to 5 and 7 gave reply by their respective letters, both dated 1 June 2010.


Aggrieved by these communications, petitioners filed the writ petition seeking recall of the letters dated 5 November 2019 and 31 March 2020 and the order dated 6 February 2020 and the order of the first Committee leading to such order. Learned counsel for the petitioners argues that the show-cause notice issued lastly to the petitioners evinces that the Identification Committee had reached a conclusion regarding the classification of the petitioners as wilful defaulters even prior to issuance of the show-cause notice. Moreover, it is argued that no copy of the forensic report, which was the basis of the orders of both the Committees, was ever served on the petitioners. That apart, it is argued that neither the order of the Identification Committee nor any notice of the Review Committee was given to the petitioners. In fact, a reply was directed to be filed by the petitioners straightaway before the Review Committee. Thus, the petitioners were not only deprived of a forum but also of the opportunity of giving a proper representation before either of the committees. 


Learned counsel for the petitioners cited various judgment and referring to clause 3(b) of the RBI Master Circular dated July 1, 2015, it was argued that the Identification Committee shall issue a show-cause notice to the concerned borrower and the promoters/ whole-time director and call for their submissions. In the present case, however, apart from the petitioner nos. 1 and 2, none of the other petitioners were promoters/ whole-time directors of the company. Moreover, the show-cause notice dated February 28, 2019 and/or the orders of both the Committees did not reveal any allegation against the Corporate Guarantors. Such guarantors, it is argued, have no liability in respect of wilful default but might only be held responsible with regard to repayment of the loan itself, if at all. Paragraph no. 2 of the writ petition indicates clearly that the petitioner nos. 3, 4, 5 and 7 are erstwhile Independent Directors, the petitioner no. 6 an erstwhile Executive Director and petitioner nos. 8 to 12 Corporate Guarantors of the company.


On the other hand, learned counsel for the respondents submits that the company itself has not come up with the writ petition or challenged the show-cause notice and/ or the orders of the Committees. The petitioners are only some of the Directors/ Corporate Guarantors and are different and distinct from the company, which is a separate juristic entity in law. It was argued, with particular reference to Section 149 of the Companies Act, that a Corporate Guarantor is different from a Corporate Debtor. Moreover, Independent Directors, though not included in clause 3(b) of the Master Circular, nonetheless have to satisfy the court regarding their non-involvement in the default. No such attempt has been made by the petitioners in the present case. It was argued that, in the circumstances, the non-service of the forensic report did not cause any prejudice to the petitioners at all.


High Court observed that the argument, that the Review Committee had no option but to confirm the Identification Committee order in its entirety, is based on faulty logic, since the petitioners had, in fact, specifically asked for a copy of forensic report and other relevant documents, which was denied to them. Thus, it was impossible for the petitioners to put their representation on fact and law before either of the Committees. The petitioners had no opportunity to refute the observations of the forensic report, to show its inherent contradictions and/ or point out the irrelevance of the report in the context of declaration of willful default, although the report was virtually the sole basis of the show cause notice and the impugned orders. The petitioners are correct in arguing that the vacating application, to which the purported forensic report has been annexed, itself does not refer to it in specific terms at all. It was sneaked into the application as an annexure, without being referred to as an annexure in the body of the vacating application. Thus, non-service of the forensic report to the petitioners at the relevant juncture assumes fatal preparations, vitiating the sanctity and legality of the orders of both the committees. In such circumstances, the committees acted contrary to logic befitting a prudent person in relying on the same as sacrosanct to hold the petitioners to be wilful defaulters. The entire effort of the Identification Committee and the Review Committee was to somehow label the petitioners as wilful defaulters, in the process violating all norms of natural justice and the provisions of the RBI Master Circular, 2015. Hence, the impugned orders are patently illegal and de hors the RBI guidelines. Accordingly, WPO 206 of 2020 is allowed, thereby setting aside the show-cause notice dated November 5, 2019 as well as the orders of the Identification Committee and the Review Committee, respectively dated October 22, 2019 and March 31, 2020.


Sabyasachi Choudhury, Pankaj Agarwal and Paramita Maity, Advocates represented the petitioners and D. Sen, M. Maitra, Suchismita Ghosh and M.K. Seal, Advocates represented the respondent.


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