Allowed

Jagdish Prasad Sarda v. Indian Bank (Erstwhile Allahabad Bank)

Telangana HC2 Sept 2024WP/30334/2023

Case brief

AI extract

What is this about?

Petitioners challenged their declaration as wilful defaulters by Indian Bank and a public notice dated 16.04.2019, contending the RBI Master Circular mechanism (committee examination, show cause notice, review committee confirmation) was not followed. The court found no record of committee proceedings or reasoned orders and allowed the writ petition.

What the court decided

AI extract

Jagdish Prasad Sarda Vs Indian Bank (Erstwhile… — Banking and Recovery | Telangana HC (2024)

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IN THE HIGH^{COURT FOR THE STATEOF TELANGANA AT HYDERABAD} (SPecial Original Jurisdiction)

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MONDAY,^{THE SECOND DAY OF SEPTEMBER} TWO THOUSAND^{ANDTWENTY FOUR}

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PRESENT

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THE HONOURABLE^{SRIJUSTICE C.V. BHASKARREDDY}

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WRIT PETITIO^{N NO: 3033 40F 2023}

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Between:

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'1 . Jaodish Prasad Sarda, s/o late Sri Ram-Nivas^{Sarda' aged about 54 years'} ' b1%Lip!tilL-"il#;; ,/" ';ii' i'o s5'^pj'"i countv'^{A-ttapur'Hvderabad-} 500048

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Manohar^{Lal Sarda, s/o late Sri Ram Nivas} ^Sarda'^{aoed about 54 years'} occupation.^{Business' tl j"v,rrJ"."'git,eaier cqunty'Aftapur'Hyderabad-} 500048

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...PETITIONER

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AND

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[i""'Iir,, fi'jri),--q'it]trii"" lndian Bank^{(Erstwhile Allahabad it s:i-o?s, Bank), s,iiuniArcade, Stressed.Assets ManagementKoti' Hvderabad'} Telangana^{- 500001}

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Committee^{for ldentificationof Wilful Defaulters' lndian Bank LErstwhile} ' xiiinii,iJainrj-s r-ozs- surabhiArcade, Koti, Hyderabad, Telangana^- 500001

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Review^{committeeon wilful Defaulters, lndian Bank (Erstwhile Allahabad} " iil"iill's:reis, srrioniA,""r"dJ,^(oii' tivJ"t'bad' Teiansana^{- 500001}

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6-1-56. Secretariat^{Road, National Highway 65'}

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4 Reserve Bank^{of lndia,} Hroeiioao^- 500^{004 Telanqana, lndia Also at'}

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Saifabad,^Khairatabad, Central Office^Building' isillr,iilinrsiisingn^{rt/iig,"Fort,Mumbai - 40000I} ' Maharashtra,^lndia

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...RESPONDENTS

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PetitionunderArticle226oflheConstitutionoflndiaprayingthatinthe circumstances^{stated in the affidavit filedtherewith' the High Court may be} pleased to issue a^{writ or orderparticularlyone in the nature of a Writ of} Mandamus^{declaring the actionof Respondent Nos' 1to 3 in declaringthe} Petitioners as^{a wilful defaulters and consequently issuinga publicnoticedated} 16.04.2|1gas^{arbitrary, illegal and violative of principles of naturaliusticebesides} being violative^{of Petitioners' fundamentalrights' as envisaged under Articles14'}

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19(1)(g) and 21 ot the Constitution of^{lndia, and consequently quash and set} aside the impugned action of the^{Respondentnos. 1 to 3 in declaring the} Petitioners as willful defaulters and^{directthe Respondents1 to 3 hereinto take} necessary consequential steps to delete^{the names of the Petitioners as wilful} defaulters, including communication of^{the sameto the relevantbanks, financial} institutions, credit institutions and other institutions^{or authorities.}

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lA NO: 2 OF 2023

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Petition under Section 151 CPC^praying that^{in the circumstances statedin} the affidavit filed in support of the^petition, the^{High Court maybe pleased to} extend the interim orders of stay dated^{04.12.2023 passed inW.P.} No.30334/2023^granting stay of all further^{proceedings pursuant to the impugned} public notice dated 16.04.2019 until further orders or until such other^{date as this} Hon'ble Court deems fit and^proper in the^{interest of justice.}

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lA NO: 1 OF 2023

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Petition under Section 151 CPC^praying that^{in the circumstances statedin} the affidavit filed in support of the^petition, the^{High Courtmay be pleased to} suspend the operation and execution of the^{purported action taken by the} Respondent 1 to 3 in declaring the Petitioners as^{wilful defaulters,pendingthe} final disposal cf this writ^petition.

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lA NO: 1 OF 2024

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Between:

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Indian Bank (Erstwhile Allahabad Bank),^{Skessed Assets Management} Branch, having its office at 5-1-679, Surabhi^{Arcade, Koti, Hyderabad,} Telangana - 500001

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Committee for ldentification of Wilful Defaulters,^{lndian Bank (Erstwhile} Allahabad Bank), 5-1-679, Surabhi Arcade, Koti,^{Hyderabad, Telangana -} 500001

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Review Committee on Wilful Defaulters,^{lndian Bank (Erstwhile Allahabad} Bank), 5-1-679, Surabhi Arcade, Koti, Hyderabad, Telangana^{- 500001}

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...PETITIONERS/RESPONDENT No.1to3 in WP

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AND

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Jagdish Prasad sarda,^{s/o late sri Ram Nivassarda, agedabout 54_Y.ears,} Octupation. Business,^{r/o Villa no.35, ParelCounty' Attapur'HyderaDao-} 500048

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2.ManoharLalSarda,s/olateSriRamNivasSarda,agedabout54years' Occupation. Business,^{r/o Villa no.35' Parel County,Attapur' HyderaDao-} 500048

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...RESPONDENTS/PETITIONERS^No-1&2

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Reserve Bank of lndia,^{6-1-56, Secretariat Road, National Highway 65'}

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Si',tiUao, Xhairatabad, Hyderabad - 500 004 Telangana, lndia Also at C"nirai dtice Building,^{siratriOanagat Singh Marg,fort,Mumbai - 400001'} Maharashtra, lndia

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4.Unionoflndia,Rep.byitsunderSecretary'MinistryofFinance,NewDelhi'

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...RESPONDENTS/RESPONDENTS

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Petition under section^{'151 CPC praying that in the circumstances statedin} the affidavit filed^{in supportof the petition,the High Court maybe pleased to} vacate the interim orders^{dt.04.12.2023 passed in writ Petition No. 30334/2023} and dismiss the W.P.^{with exemplary costs.}

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Counsel for the Petitioner^{: SRI D.SRINIVAS PRASAD}

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Counsel for the Respondents^{No.1to3 : V'DYUMANI}

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Counsel forthe Respondents^No.4:

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The Court made the^{following:ORDER}

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HON'BLE SRI JUSTTCE C.V.BHASKAR REDDY

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WRIT PETITION No.3O334 of 2O23

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ORDER:

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This Writ Petition has been filed seeking to declare the action of respondent Nos.l to 3 in declaring the petitioners as wilful defaulters and consequently issuing a public notice dated 16.04.2019 as arbitraqr, illegal and violative of principles of natural justice and the petitioners' fundamental rights, as envisaged under Articles 14, l9(l)(A) and 2l of the Constirution of India and consequently to quash and set aside the impugned action of respondent Nos.1 to 3 in declaring the petitioners as willful defaulters and directing respondent Nos. I to 3 to take necessary consequential steps to delete the names of the petitioners from wilful defaulters and for other consequential reliefs.

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The petitioners state that they were the Managing Directors of M/s. Sarda Agro Oils Limited, which is said to have been registered and incorporated under the provisions of the Companies Act, 2013. The case of tle petitioners is that the said company has been sanctioned .a credit loan by respondent No. I uide proceedings in Ref.No.HOIADV/ ZOHIS AOLI2OL213/517, dated 31.O5.2O12 to the tune of Rs.55,00,0OO/-, on

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furnishing all the necessary documents as collateral security. It is ttre further case of the petitioners that they have incurred huge loss ald ttrey were not in a^position to^clear the^loan amount as p€r the time^granted by^{the bank which constrained} them to make an application seeking renewal^{of limits on the lile} of respondent No. l-Bank. The case^{of the petitionersis that the} respondents, without taking into consideration^{of the said facts,} declared the loan account as a Non-Performing^{Asset (NPA) on} 29.1O.2015. Questing the same,^{thepetitioners ftled} W.P.No.2214 of 2016 and this^{Court, uide orderdated} 1a.O8.2O22 dismissed the said writ^{petition for default. It is} stated that respondent No.1-bank^{has also hled an application} under Section 7 of the Insolvency^{and BankruptcyCode, 2016} (for short, "IBC") for default in^{payment accumulated to the tune} of Rs.77,80,99,O79 l- as on^{28.12.2018.[t is also statedthat} the National Company Law^{Tribunal(NCLT)admitted the said} application, instituted under^Sectio n^{7 ofthe IBCand} questioning the same, the^{petitioners filed Company Appeal (AT)} (Insolvency) No.183 of 2O2O before^{the National CompanyLaw} Appellate Tribunal^{(NCALT) on the groundthat the proceedings} under Sectio n 7 of the IBC^{before the NCLT were initiated} beyond th'e^period of three^{years from the date of which the} relevant loan account^{was declared as NPA. It is stated that}

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accepting the said condition, NCLAT had set aside the order of admission of the application submitted by respondent No. 1- bank under Section 7 of the IBC uide its order 28.08.2020. It is statqd that questioning the same, respondent No.l-bank liled SLP Civil Appeal No.3849 /2020 on the file of the Hontrle Apex Court and the Hon'ble Apex Court uide its order dated 13.O9.2022 allowed the said appeal and restored the application Iiled by respondent No. l-bank on the file of the NCLT for adjudication of the same in terms of IBC.

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While the matter stood thus, respondent No.l issued a paper publication dated 16.04.2024 stating that the petitioners have been declared as willful defaulters by the respondent No. l- bank and the borrower partner is not entitled for financial assistance from any other banks/financial institutions. Questioning^{the said paper publication/declaration,the present} Writ Petition has been filed on the ground that the respondents have not followed the procedure as contemplated by the Reserve Bank of India uide Master Circular bearing No.RBI/2014- 15/73lDBR.No.CID.BC.57l 20.t6.Oos I 20t4-ls, dated Ol.O7.2OI4.

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Clause 3 of the said circular reads as under:

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"The transparent mechanism referred to in Paragraph 2.5(d) above should generally include the following:

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(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 oflicers of the rank of GM/DGM.

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(b) If the Committee concludes that al event of wilful default has occurred, it shall issue a Show Cause^{Notice to} the concemed borrower and tl.e^{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^{a;rd the} promoter/whole-time director for a personal hearing if^the Committee feels such an opportunity^{is necessary.}

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(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 hnal} only after it is confirmed by the said^{ReviewCommittee.}

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(d) As regard a non-promoter/non-whole time director,^it should be kept in mind that Section^{2(6O) of the} Companies Act, 2013 defines an oIficer^{who is in default to} mean only the following categories of directors:

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(i) Whole-time director

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(ii) where there is no key managerial^personnel, such director or directors as specifred by^{the Boardin this} behatf and who has or have^given his^{or theirconsent in} writing to the Board to such specihcation, or^{all the} directors, if no director is so specified;

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(iii) every director, in respect of a contravention of any of the provisions of this Act, who is aware^{of such} contravention by virtue of the receipt by^{him of any} proceedings of the Board or participation in such proceedings arld who has not objected to the same, or where such contravention had taken^place with^his consent or connivance.

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\ Therefore, except in very r:rre cases, a non-whole^time director should not be considered as a^{wilful defaulter}

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\ unless it is conclusively established that

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I. he was aware of the fact of wilful default by the borrower by virtue of any proceedings recorded^{in the Minutes of the}

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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.

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A similar process as detailed in sub paras (a) to (c) above should be followed when identifying a non-promoter/nonwhole time director as a wilful defaulter."

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A clear reading of the said circular would reveal that the evidence, being collected against the borrowing company as wilful defaulter and its promoter/whole-time director, shall be examined by the Committee headed by the Executive Director and consisting of two other senior officers of the rank of GM/DGM. Thereafter, if the said committee concludes that in the event of wilful default has occurred, it shall issue a showcause notice to the concerned borrower and the promoter/whole-time director and call for their submission and after considering their submissions, issue an order recording the fact of wilful defaulter. Thereafter, . an opportunity is provided to the petitioner/ borrower/wilful defaulters to make representation to the Review Committee constituted under the provisions of the said circular. The grievance of the petitioners is that the respondents, without following the procedure as contemplated by the Reserve Bank of India and without passing any order giving valid reasons, have issued a paper publication declaring thepqgitioners as wilful defaulter and the said action

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on the part of the respondents not only amounts to violation of the procedure contemplated for declaring as wilful defaulters, but also amounts to violation of principles of natural^justice.

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Respondent Nos. I to 3 have filed counter affidavit stating that respondent No.l-bank issued show cause notice dated 16.03.2016 to the petitioners as to why they shall not be

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declared as "wilful defaulters" as the unit was defaultedⁱⁿ meeting its payment/repayment obligations to the lender^and has siphoned off the funds so that the funds have^{been utilized} for the purpose for which ftnance was availed. It is also stated that after the personal visit, the respondent-bank^{has sent the} notice through registered post with acknowledgment^{due and} the said notice was served on the borrower^{at Kakinadaaddress;} petitioner No. l's address at Somajiguda and the respondent bank has not received acknowledgment or returned^{cover from} petitioner No.2. It is further stated that, even after receipt of^the show cause noLice, ttre^petitioners have not submitted^any explanation and as such respondent No.2 recommended^to declare the petitioners as wilful defaulters in the^{meeting held}

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. on 1i|*O3-.2O 16, based on the^{informationavailable that the} borrower and petitioners are^{qualihed for declarationas wilful}

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defaulters and accordingly recommended the same to respondent No.3.

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While stating so, the respondents have not stated when and on what date, the reports were placed before the wilful I defaulters committee as constituted in terms of the guidelines issued by the Reserve Bank of India and proceedings, if any, passed against the petitioners declaring the petitioner as wilful defaulter and communication of the said proceedings to the petitioners, to enable them to make an application on the lile of the Review Committee as constituted under Clause 3 of the said Master Circular.

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In the counter affidavit, except stating that they have followed the procedure as contemplated under the circular instructions issued by the Reserve Bank of India, there is no whisper about the proceedings, which have been mentioned/passed by the wilful defaulters, committee and communication of the said proceedings to the petiLioners, to enable the petitioners to make an application seeking to review the decision being taken by the wilful defaulters' committee. The procedure adopted by the respondents is not in consonance with the guidelines issued in the Master Circular instructions.

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Learned counsel appearing for the petitioners relied upon Para 24 of the judgment of the Honble Apex Court in Stcrte Bank of India v. Jah Deaelopers priaate Limitedr and contended that in t}-re absence of giving reasons declaring the petitioners as wilful defaulters and communicating thl same, the respondents are not having any power to declare the petitioners as wilful defaulters and the said action is not sustainable in law.

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Since it is borne from the record that the respondents have not adopted the procedure in terms of the guidetines issued by the Reserve Bank of India and also the law laid down by the Honble Apex Court in State Bornk of India u. Jah Deuelopers Prioate Limited. (cited supra), this Writ petition is allowed and the respondents are directed to follow the Reserve Bank of India guiderines issued under the Master circurar on wilful defaulters and conclude the enquiry within a period of eight (O8) weeks thereafter. There sha.ll be no ord.er as to costs.

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As a sequel, the miscellaneous petitions pending, if any, shall stand closed.

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<br>

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SD/- N. SRIHARI ASSISTANT GIS //TRUE COPY//

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SE OFFICER

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To,

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1 The Stressed Assets Management Branch, lndian Bank (Erstwhile Allahabad Bank), at 5-1-679, Surabhi Arcade, Koti, Hyderabad, Telingana - 5OOO01

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2 The Committee for ldentification of Wilful Defaulters, lndian Bank (Erstwhile Allahabad Bank), 5-1-679, Surabhi Arcade, Koti, Hyderabad, Telangana - 500001

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3 The Review committee on wirfur Defaurters, rndian Bank (Erstwhile Arahabad Bank), 5- 1 -679, Surabhi er*0", rGi, Hii"i.iro, r"r""gir;f Udbll,iii-,,-

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1. Ihg Reserve Bank of India, 6_1_56, Secretariat I

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\ q;idr;;a;ih";;i:liao,Aytie-rqb_ai-si"d"diliff iil,[i,fi l*x,,gj:iruu Maharashtra, Centrat Office Buitding, lndia Siinio ahigit-si"gi v,,,l, tir:",y,q rg, FoI v r (t , Mumbrvrur (, a i t _ 4 0oo,1uuuu],

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