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HIGH COURT OF DELHI
JUDGMENT
RAJKUMAR SUKHDEVSINHJI & ANR. .....Petitioners
Through: Mr.Sandeep Sethi, Sr. Advocate with Mr. Rishi Aggarwala, Mr.Pranjit Bhattacharya and
Mr.Tejasvi Chaudhary and Mr.Srikhar, Advocates.
Through: Mr.Siddhartha Barua, Mr. Akash Mohan Srivastav and
Mr.Nandlal Singh, Advocates.
1. The petitioners are invoking the extraordinary jurisdiction of this Court under Article 226 of the Constitution of India, seeking issuance of appropriate writ, order or direction, thereby quashing or setting aside the impugned Show Cause Notice [“SCN”] dated 19.06.2024 issued by the respondent-bank. The following reliefs are sought in the present writ petition:- “A.Issue a writ of Certiorari or any other appropriate writ, orderor direction quashing the Impugned Notice dated19.06.2024 issued by the Respondent Bank being Ref No.IDBI/2024- 25/NMG/EPCCIL/184 and Impugned Noticedated 19.06.2024 issued by the Respondent Bank being RefNo. IDBI/2024- 25/NMG/EPCCIL/185 as illegal, invalidand null and void; B.Issue a Writ of Certiorari or any other appropriate writ,order or direction quashing any steps/action taken pursuantto the Impugned Notice dated 19.06.2024 issued by theRespondent Bank being Ref No. IDBI/2024-25/NMG/EPCCIL/184 and Impugned Notice dated19.06.2024 issued by the Respondent Bank being Ref No.IDBI/2024-25/NMG/EPCCIL/185; and
2. Learned counsel for the respondent appeared on advance notice.
3. Mr. Sandeep Sethi, learned Senior Advocate appearing for the petitioners while alluding to the impugned SCN, has firstly pointed out that petitioner No.1 has been addressed as an „Ex Independent Director‟; secondly, it is pointed out that the respondent-bank has alleged that certain acts of financial irregularities have been committed by the petitioner on different dates during the period from November, 2014 to 31st March 2017.
4. It was urged that the corporate borrower in question i.e. EPCCIL[1] had evidently availed certain loan facilities from a consortium of eight banks including the respondent-bank and although in the impugned SCN, it is alleged that some financial irregularities amounting to fraud were committed by the company in question, it is urged that the truth of the matter is that the company in question was facing economic hardships as its business had taken a down-turn due to reasons beyond its control. It is pointed out that a forensic auditor viz., Grant Thornton LLP was appointed at the behest of the respondent-bank, and pursuant thereto, the respondent-bank communicated to the company in question that the action of „red flagging‟ of its account had already been withdrawn by them.
5. It is then pointed out that eventually, proceedings under Section 7 of the IBC[2] were initiated against the corporate borrower before the 1EPC Constructions India Limited [formerly known as Essar Projects (India) Limited] Insolvency and Bankruptcy Code, 2016 NCLT[3], Mumbai in C.P. (I.B.) No. 1832/(MB)/2017 titled as IDBI Bank v. EPC Constructions India Ltd. due to purported defaults in repayment of credit facilities obtained by it. Accordingly, w.e.f. 20.04.2018 the company was admitted to insolvency and appropriate CIRP[4] proceedings were initiated by appointing a Committee of Creditors. Subsequently, an IRP[5] was appointed w.e.f. 10.05.2018.
6. In the said backdrop, it is submitted that the impugned SCN has been issued in a mindless and mechanical manner, rather with a premeditated mind overlooking the fact that no financial irregularity in the nature of fraud was found and the same is substantiated by forensic audit report conducted at the behest of the respondent-bank; and it is urged that the petitioners were not even Directors since December, 2017 as evidently, the company had been proceeded under IBC and moratorium under section 14 of the IBC had crept in.
7. Alluding to clause 8.96 and 8.12.[1] of the Master Directions of Frauds, it is vehemently urged that the impugned SCN clearly overlooks that the penal provisions could only be applied to nonwhole time directors (like nominee directors and independent directors) only in rarest cases based on conclusive proof of their complicity. It is also pointed out that no action has been taken by the Bank within the period of six months from the date when the first member bank reported the account as „fraud‟ on CRILC[6] platform. It was vehemently urged that the impugned SCN issued by the National Company Law Tribunal Corporate Insolvency Resolution Process Interim Resolution Professional Central Repository of Information on Large Credits respondent-bank is without jurisdiction, non est in law and must be quashed.
8. Per contra, learned counsel for the respondent-bank urged that only SCN has been issued since a reply has been filed in response thereto dated 01.07.2024 and for some reasons, the petitioners have not chosen to appear for a personal hearing and thus, the present petition is premature. Learned counsel of the respondent-bank urged that the petitioners cannot challenge the impugned SCN by filing the present writ petition, for which heavy reliance is placed on decisions in Union of India v. Kunisetty Satyanarayana[7]; Malladi Drugs & Pharma Ltd. v. Union of India[8]; CCE v. Krishna Wax (P) Ltd.[9]
9. On the other hand, learned Senior Advocate for the petitioners distinguishing the case laws cited by the learned counsel of the respondent, relied on decisions in Shantanu Prakash v. State Bank of India10 and State Bank of India v. Rajesh Agarwal11.
ANALYSIS & DECISION:
10. Having heard the learned counsel for the parties and on perusal of the record besides having gone through the case laws relied upon by the learned counsels for the parties, this Court finds that the issues raised by the learned Senior Advocate for the petitioners certainly require a deeper examination.
11. First things first, the decision in the case of Shantanu Prakash (supra), heavily relied upon by the learned counsel for the respondent,
2023 SCC OnLine SC 342 was one wherein this Court reiterated the decision in the case of Rajesh Agarwal (supra) and the petitioner, who was also an Ex- Director and a guarantor of the company, had availed various credit facilities from consortium of banks, of which the respondent banks were also members and it was found that there was not only a violation of the principles of nature justice inasmuch as relevant documents were not supplied to the petitioner, but also that the petitioner was not given any opportunity before classifying his accounts as „fraud‟. Resultantly, this Court passed directions against the respondents to allow the petitioner and/or authorized representative to inspect the records of the company besides the records which are available and in possession of the IRP and once that bridge was passed, the petitioner was called upon to make representation and to be afforded an opportunity of hearing before passing appropriate directions.
12. At this juncture, it would be appropriate to refer to the relevant finings by the Supreme Court in the case of Rajesh Agarwal (supra), which are as under: “xxx xxx xxx
67. The Master Directions on Frauds do not expressly exclude a right of hearing to the borrowers before action to class their account as frauds is initiated. The principles of natural justice can be read into a statute or a notification where it is silent on granting an opportunity of a hearing to a party whose rights and interests are likely to be affected by the orders that may be passed.
70. In Mangilal v. State of M.P. [Mangilal v. State of M.P., (2004) 2 SCC 447: 2004 SCC (Cri) 1085], a two-Judge Bench of this Court held that the principles of natural justice need to be observed even if the statute is silent in that regard. In other words, a statutory silence should be taken to imply the need to observe the principles of natural justice where substantial rights of parties are affected: (SCC pp. 453- 54, para 10)
………….
75. As mentioned above, Clause 8.9.[6] of the Master Directions on Frauds contemplates that the procedure for the classification of an account as fraud has to be completed within six months. The procedure adopted under the Master Directions on Frauds provides enough time to the banks to deliberate before classifying an account as fraud. During this interval, the banks can serve a notice to the borrowers, and give them an opportunity to submit their reply and representation regarding the findings of the forensic audit report. Given the wide time-frames contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for banks to provide an adequate opportunity of a hearing to the borrowers before classifying their account as fraud.
76. The exclusion contemplated in the decision of this Court in Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398: 1985 SCC (L&S) 672] would not be applicable because giving an opportunity of a hearing to the borrowers will not obstruct the taking of prompt action under the Master Directions on Frauds. ………
79. In Swadeshi Cotton Mills [Swadeshi Cotton Mills v. Union of India, (1981) 1 SCC 664], this Court held that a company is entitled to an opportunity to explain the evidence collected against it and represent why the proposed action should not be taken: (SCC p. 707, para 85)
80. Audi alteram partem has several facets, including the service of a notice to any person against whom a prejudicial order may be passed and providing an opportunity to explain the evidence collected. In Tulsiram Patel [Union of India v. Tulsiram Patel, (1985) 3 SCC 398: 1985 SCC (L&S) 672], this Court explained the wide amplitude of audi alteram partem: (SCC p. 476, para 96)
evidence against him examined in his presence and have the right to cross-examine them, and to lead his own evidence, both oral and documentary, in his defence. The process of a fair hearing need not, however, conform to the judicial process in a court of law, because judicial adjudication of causes involves a number of technical rules of procedure and evidence which are unnecessary and not required for the purpose of a fair hearing within the meaning of audi alteram partem rule in a quasijudicial or administrative inquiry.”
81. Audi alteram partem, therefore, entails that an entity against whom evidence is collected must: (i) be provided an opportunity to explain the evidence against it; (ii) be informed of the proposed action, and (iii) be allowed to represent why the proposed action should not be taken. Hence, the mere participation of the borrower during the course of the preparation of a forensic audit report would not fulfil the requirements of natural justice. The decision to classify an account as fraud involves due application of mind to the facts and law by the lender banks. The lender banks, either individually or through a JLF, have to decide whether a borrower has breached the terms and conditions of a loan agreement, and based upon such determination the lender banks can seek appropriate remedies. Therefore, principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the findings in the forensic audit report, and to represent before the account is classified as fraud under the Master Directions on Frauds..........
87. Administrative proceedings which entail significant civil consequences must be read consistent with the principles of natural justice to meet the requirement of Article 14. Where possible, the rule of audi alteram partem ought to be read into a statutory rule to render it compliant with the principles of equality and nonarbitrariness envisaged under Article 14. The Master Directions on Frauds do not expressly provide the borrowers an opportunity of being heard before classifying the borrower's account as fraud. Audi alteram partem must then be read into the provisions of the Master Directions on Frauds. ………….
95. In light of the legal position noted above, we hold that the rule of audi alteram partem ought to be read in Clauses 8.9.[4] and 8.9.[5] of the Master Directions on Fraud. Consistent with the principles of natural justice, the lender banks should provide an opportunity to a borrower by furnishing a copy of the audit reports and allow the borrower a reasonable opportunity to submit a representation before classifying the account as fraud. A reasoned order has to be issued on the objections addressed by the borrower. On perusal of the facts, it is indubitable that the lender banks did not provide an opportunity of hearing to the borrowers before classifying their accounts as fraud. Therefore, the impugned decision to classify the borrower account as fraud is vitiated by the failure to observe the rule of audi alteram partem. In the present batch of appeals, this Court passed an ad interim order [Shree Saraiwwalaa Agrr Refineries Ltd. v. Union of India, 2022 SCC OnLine SC 1905] restraining the lender banks from taking any precipitate action against the borrowers for the time being. In pursuance of our aforesaid reasoning, we hold that the decision by the lender banks to classify the borrower accounts as fraud, is violative of the principles of natural justice. The banks would be at liberty to take fresh steps in accordance with this decision............
98. The conclusions are summarised below:
98.1. No opportunity of being heard is required before an FIR is lodged and registered.
98.2. Classification of an account as fraud not only results in reporting the crime to the investigating agencies, but also has other penal and civil consequences against the borrowers.
98.3. Debarring the borrowers from accessing institutional finance under Clause 8.12.[1] of the Master Directions on Frauds results in serious civil consequences for the borrower.
98.4. Such a debarment under Clause 8.12.[1] of the Master Directions on Frauds is akin to blacklisting the borrowers for being untrustworthy and unworthy of credit by banks. This Court has consistently held that an opportunity of hearing ought to be provided before a person is blacklisted.
98.5. The application of audi alteram partem cannot be impliedly excluded under the Master Directions on Frauds. In view of the timeframe contemplated under the Master Directions on Frauds as well as the nature of the procedure adopted, it is reasonably practicable for the lender banks to provide an opportunity of a hearing to the borrowers before classifying their account as fraud.
98.6. The principles of natural justice demand that the borrowers must be served a notice, given an opportunity to explain the conclusions of the forensic audit report, and be allowed to represent by the banks/JLF before their account is classified as fraud under the Master Directions on Frauds. In addition, the decision classifying the borrower's account as fraudulent must be made by a reasoned order. 98.7. Since the Master Directions on Frauds do not expressly provide an opportunity of hearing to the borrowers before classifying their account as fraud, audi alteram partem has to be read into the provisions of the directions to save them from the vice of arbitrariness. xxx xxx xxx”
13. In light of the aforesaid observations, it is apparent that despite a clean chit given by the forensic auditor and the fact that the CIRP proceedings had been initiated from 20.04.2018, coupled with the fact that the petitioner No.1 is described as Ex. Independent Director, a prima-facie ground is made that the impugned SCN is vulnerable in law. Further, the copies of the documents which have been relied upon, have not been supplied. The respondent is also duty bound to supply the report of the forensic audit conducted against it so as to consider what changes in the circumstances, if any, were brought out and in what manner if at all, the report was found to be not correct or unreliable.
14. In view of the above, this Court finds that this is a fit case for issuance of notice and the same is apparently accepted by learned counsel for the respondent. Let a reply be filed within four weeks from today. Respondent is further directed to place on record the complete report of the forensic audit conducted by Grant Thornton LLP.
15. Re-notify on 20.08.2024. Since detailed submissions have been addressed, the matter be kept in the category of „Part-Heard‟.
16. In the meanwhile, the operation of impugned SCN dated 19.06.2024 shall remain in abeyance.
DHARMESH SHARMA, J. JULY 16, 2024 Sadiq/sp