Allowed

M/S Metal Closures Pvt. Ltd. v. M/S Punjab National Bank

Karnataka HC16 Mar 2023WP/28058/2018

Case brief

AI extract

What is this about?

Writ petitions filed by a company and its directors against three banks seeking quashing of their declaration as wilful defaulters. The High Court of Karnataka quashed the declarations and directed the banks to redo the exercise after providing an opportunity to the petitioners to file additional replies.

What did the court decide?

Write petitions allowed; impugned declarations quashed; liberty reserved for banks to redo exercise after providing fresh opportunity to petitioners.

M/S Metal Closures Pvt. Ltd. Vs M/S Punjab National… — Banking and Recovery | Karnataka HC (2023)

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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IN THE HIGH COURT OF KARNATAKA AT BENGALURU DATED THIS THE 16^TH DAY OF MARCH, 2023 BEFORE

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THE HON'BLE MR JUSTICE RAVI V HOSMANI WRIT PETITION NO.28058 OF 2018 (GM-RES)

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C/W

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WRIT PETITION NO.44069 OF 2018 (GM-RES) & WRIT PETITION NO.50711 OF 2018 (GM-RES)

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IN W.P.NO.28058/2018:

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BETWEEN:

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M/S. METAL CLOSURES PVT LTD., A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 HAVING ITS REGISTERED OFFICE AT NO.39/4B, 12^TH KM, KANAKPURA ROAD, BANGALORE - 560 062, HEREIN REP. BY MR. PRASHANTH HEGDE, ITS MANAGING DIRECTOR.

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MR. PRASHANTH HEGDE, S/O RATHNAKAR HEGDE, AGED ABOUT 66 YEARS,

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DR. SHEREEN HEGDE, W/O MR. PRASHANTH HEGDE, AGED ABOUT 61 YEARS,

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Digitally signed by GURURAJ D Location: High Court of Karnataka

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BOTH THE ABOVE MENTIONED PARTIES ARE RESIDENTS OF NO.261, DEFENCE COLONY, INDIRANAGAR, BANGALORE - 560 038.

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…PETITIONERS

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(BY SRI K.SHASHIKIRAN SHETTY, SR. ADVOCATE FOR SRI H.N. VASUDEVAN, ADVOCATE)

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AND:

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M/S. PUNJAB NATIONAL BANK, LARGE CORPORATE BRANCH, CENTENARY BUILDING, 28,

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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M.G.ROAD, BANGALORE - 560 001. HEREIN REP. BY ITS DEPUTY GENERAL MANAGER.

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…RESPONDENT

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(BY SRI. VIGNESH SHETTY, ADVOCATE)

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THIS WP IS FILED UNDER ARTICLES 226 & 227 OF THE CONSTITUTION OF INDIA, PRAYING TO-QUASH THE LETTER DATED 05.06.2018 ISSUED BY THE RESPONDENT THREATENING TO PUBLISH THE PHOTOGRAPHS OF THE PETITIONERS AS WILFUL DEFAULTERS IN THE NEWSPAPERS VIDE ANNEXURE-A AND ISSUE A DECLARATION THAT THE PETITIONERS ARE NOT WILFUL DEFAULTERS BY QUASHING THE ENTIRE PROCEEDINGS INSTITUTED BY THE RESPONDENT IN PURSUANCE OF THE RBI MASTER CIRCULAR DATED 01.07.2015 PRODUCED HEREWITH AS ANNEXURE-R AND ETC.,

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IN W.P.NO.44069/2018:

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BETWEEN:

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M/S. METAL CLOSURES PVT LTD., A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 HAVING ITS REGISTERED OFFICE AT NO.39/4B, 12^TH KM, KANAKPURA ROAD, BANGALORE - 560 062, HEREIN REP. BY MR. B. PRASHANTH HEGDE, ITS MANAGING DIRECTOR.

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MR. B. PRASHANTH HEGDE, S/O RATHNAKAR HEGDE, AGED ABOUT 66 YEARS,

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DR. SHEREEN HEGDE, W/O MR. PRASHANTH HEGDE, AGED ABOUT 65 YEARS,

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PETITIONER NO.1 TO 3 ARE R/AT NO.261, DEFENCE COLONY, INDIRANAGAR, BANGALORE - 560 038.

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…PETITIONERS

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3 - WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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(BY SRI K.G. RAGHAVAN, SR. ADVOCATE FOR SRI H.N. VASUDEVAN, ADVOCATE)

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AND:

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STATE BANK OF INDIA, THROUGH ITS STRESSED ASSETS MANAGEMENT BRANCH, HAVING ITS OFFICE AT: 2^ND FLOOR, OFFICE COMPLEX BUILDING, LHO CAMPUS, #65, ST. MARKS ROAD, BANGALORE - 560 001. HEREIN REP. BY ITS DEPUTY GENERAL MANAGER.

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…RESPONDENT

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(BY SRI VIKRAM HUILGOL, ADVOCATE FOR SRI B. PRASANNA KUMAR, ADVOCATE)

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THIS WP IS FILED UNDER ARTICLES 226 & 227 OF THE CONSTITUTION OF INDIA, PRAYING TO QUASH THE ORDER DATED 05.02.2018 PASSED BY THE WILFUL DEFAULTER IDENTIFICATION COMMITTEE OF THE RESPONDENT BANK WHICH IS CONFIRMED BY THE REVIEW COMMITTEE IN ITS MEETING DATED 22.03.2018 DECLARING THE PETITIONERS HEREIN AS WILFUL DAFAULTER VIDE ANNEXURE-A AND ETC.,

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IN W.P.NO.50711/2018:

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BETWEEN:

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M/s. METAL CLOSURES PVT LTD., A COMPANY INCORPORATED UNDER THE PROVISIONS OF THE COMPANIES ACT, 1956 HAVING ITS REGISTERED OFFICE AT NO.39/4B, 12^TH KM, KANAKPURA ROAD, BANGALORE - 560 062, HEREIN REP. BY MR. B. PRASHANTH HEGDE, ITS MANAGING DIRECTOR.

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MR. B. PRASHANTH HEGDE, S/O RATHNAKAR HEGDE, AGED ABOUT 69 YEARS,

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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DR. SHEREEN HEGDE, W/O MR. B. PRASHANTH HEGDE, AGED ABOUT 65 YEARS,

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PETITIONER NO.2 AND 3 ARE R/AT NO.261, DEFENCE COLONY, INDIRANAGAR, BANGALORE - 560 038.

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…PETITIONERS

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(BY SRI K.SHASHIKIRAN SHETTY, SR. ADVOCATE FOR SRI H.N. VASUDEVAN, ADVOCATE)

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AND:

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UCO BANK, THROUGH ITS ZONAL OFFICE, SITUATED AT NO.13/22, K.G.ROAD, BANGALORE-560 009. HEREIN REP. BY ITS ZONAL MANAGER.

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…RESPONDENT

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(BY SRI K.R.PARUSHURAM & SRI H.MUJTABA, ADVOCATES)

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THIS WP IS FILED UNDER ARTICLES 226 & 227 OF THE CONSTITUTION OF INDIA, PRAYING TO DIRECT THE RESPONDENT TO DELETE THE NAME OF THE PETITIONERS FROM THE LIST OF WILFUL DEFAULTERS PREPARED BY IT IN PURSUANCE TO THE MASTER CIRCULAR ISSUED BY THE RESERVE BANK OF INDIA AS IT IS IN KVIOLATION OF PRINCIPLES OF NATURAL JUSTICE AND ETC.,

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THESE PETITIONS ARE COMING ON FOR PRELIMINARY HEARING B-GROUP, THIS DAY, THE COURT MADE THE FOLLOWING:

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ORDER

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In these writ petitions, petitioners are assailing declaration by respondent - Banks that petitioners are 'willful defaulters', either by questioning resolutions of Willful Defaulter's Identification Committee (hereinafter referred to as

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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'WDIC' for short) or by seeking for declaration against such action by respondent - Banks.

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As challenge is on similar grounds and under similar circumstances, instead of stating facts in all the respective cases, facts involved only in lead case i.e. W.P.no.44069/2018 would be stated. Findings therein would apply to other cases mutatis mutandis .

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In W.P.no.28058/2018, however an additional contention about such declaration being without issuance of notice to petitioner is also urged and would be dealt with separately.

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Sri K.G.Raghavan, learned Senior Counsel appearing for Sri. H.N.Vasudevan, learned counsel for petitioners submitted that petitioner no.1 - Company was incorporated in year 1977 under provisions of Companies Act, 1956. It went into commercial production, manufacturing, packaging products like ROPP Caps, Crown Corks, Shoe Polish containers, Battery Jackets, Lug Caps, Flash Torches etc. For said business petitioners no.2 and 3 (for short 'petitioners') had availed loan from consortium of Banks comprising of State Bank of India,

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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UCO Bank and Punjab National Bank large corporate branch. With State Bank of India being lead Bank, petitioners were initially provided credit facility of Rs.28 Crores with letter of credit for Rs.27 Crores and term loan of Rs.42 Crores i.e. in all a total financial exposure of Rs.97 Crores. Same later got reduced to Rs.68 Crores.

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At that point, petitioners detected fraud in its operations involving its CFO and Banking Executives, which was reported to Banks. Instead of assisting petitioners to unearth fraud, respective respondent - Banks illegally proceed against petitioners under provisions of SARFAESI Act. It was submitted that petitioners have preferred appeal against said measures and also sought costs and compensation. In said proceedings, consortium Banks have entered appearance and are contesting said proceedings.

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It was further submitted that as there was siphoning away of funds from account of petitioner no.1 - Company by Bank officials in collusion with certain employees of petitioner no.1 - Company, criminal proceedings were also initiated. In said proceedings, charge-sheet is filed by CID (Economic Offences Division) Karnataka.

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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In meanwhile, as provided in Master Circular dated

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01.07.2015 issued by Reserve Bank of India for purposes of dissemination to Credit Companies, of information about willful defaulters, respondent - Banks issued show-cause notice to petitioners on 31.08.2016. Further notices were also issued on 30.12.2016, 07.04.2017, 20.01.2018 and 10.05.2018. Petitioners responded to same under letters dated 01.10.2016, 20.01.2017, 19.04.2017, 02.02.2018 and 14.05.2018 etc. Thereafter, some of allegations were withdrawn.

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However, without affording any further opportunity of being heard and considering objections filed, WDIC of respondent - Banks in its meeting held on 05.02.2018, declared petitioners as 'willful defaulters'.

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Learned Senior Counsel, at outset submitted that

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very notice issued to petitioners was defective, as it did not specify how conduct of petitioners and/or it's officials would be fall within meaning of 'willful default' defined under Master Circular - Annexure-'AC'. It was submitted that definition of 'willful default' as per Clause 2.1.3 of Master Circular reads as follows:

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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"2.1.3 Wilful Default: A 'wilful default' would be deemed to have occurred if any of the following events is noted:

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(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.

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(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.

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(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.

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(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.

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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 categorized as wilful must be intentional, deliberate and calculated."

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It was submitted that in notice - Annexure-'AC', it was stated that WDIC had examined conduct of account and utilization of credit facilities and concluded that acts/events of

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9 - WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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'willful default' as detailed in annexures were committed by petitioners and called for explanation from petitioners before passing necessary orders.

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It was further submitted that though petitioners submitted detailed and item-wise reply as per Annexure-'AB, AB1 to AB4', WDIC proceeded to issue declaration about petitioners as 'willful defaulters' vide order dated 05.02.2018 - Annexure-A. It was contended that said order did not consider petitioners specific objections and also failed to specify how and under what circumstances, petitioners conduct would fall within folds of definition of 'willful defaulters' as per Master Circular issued by RBI.

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It was further submitted that since criminal proceedings initiated by petitioners were pending against officials of Bank, action of WDIC to proceed to declare petitioners as 'willful defaulters' was uncharitable, as well as arbitrary, especially when civil consequences that would befall upon petitioners consequent to such declaration would be severe and grave. On above grounds, learned counsel sought for allowing writ petitions by quashing impugned declaration.

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10 - WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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On other hand, Sri Vikram Huilgol, learned Senior Counsel appearing for Sri B.Prasanna, learned counsel for respondent - Banks sought to oppose writ petitions.

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It was submitted that without addressing issue of validity of show-cause notice (since it was not specifically questioned) and also about merits of impugned declarations, since lack of adequate opportunity was urged, instead of harping upon technicalities, without conceding on merits, it was submitted, if this Court were to come to conclusion that petitioners deserved to be provided opportunity, respondent - Banks would redo exercise after affording same and pass fresh orders in accordance with law.

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Heard learned Senior Counsel, perused impugned declaration and records.

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A bare perusal of impugned declaration would reveal that instead of considering petitioners objections and assigning specific reason for rejection of same and also without specifying how petitioners conduct would attract criteria stipulated for constituting 'willful defaulters' as defined under Master Circular, by a cryptic conclusion, declaration is issued, which would not

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11 -

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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satisfy test of reasonableness enshrined under Art.14 of Constitution of India. It is settled law that all orders imposing civil consequences upon individuals are required to be passed by assigning adequate and relevant reasons as would be required to dispel arbitrariness.

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On such broad conclusion, impugned action for declaration of petitioners as 'willful defaulters' would not be sustainable and same would require to be redone by respondent - Banks.

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Insofar as specific contention urged in W.P.no.28058/2018 that show cause notice stated to have been issued was not served upon petitioners, it is seen that respondent - Bank has since produced show-cause notice issued along with statement of objections filed herein. Since impugned declaration in said case also suffers from similar vice as in other cases dealt with which are being remanded back, it would suffice to direct petitioner to treat show-cause notice produced in these proceedings as such and file reply/additional reply to same, which would be taken note of by respondent - Bank while passing fresh orders.

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12 -

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WP No. 28058 of 2018 C/W WP No. 44069 of 2018 WP No. 50711 of 2018

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19. In all other aspects, observations/directions issued

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would be applicable to all petitions in common.

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In view of above discussion, following

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O R D E R

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i. Writ petitions are allowed.

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ii. Order/declaration passed by Willful Defaulter Identification Committee of respondent - Banks impugned in these writ petitions against petitioners are quashed.

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iii. Liberty is reserved to respondent - Banks to redo exercise once again after providing opportunity to petitioners to file reply/additional reply, if any within two months and thereafter to proceed for consideration afresh in accordance with law, in light of observations made herein.

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Sd/JUDGE

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GRD

M/S Metal Closures Pvt. Ltd. v. M/S Punjab National Bank

Case brief

What is this about?

What did the court decide?

M/S Metal Closures Pvt. Ltd. v. M/S Punjab National Bank

Case brief

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What did the court decide?

What the court decided

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