Shantanu Prakash v. Union Bank of India

11. Mr. Gaggar, who appears for the Bank on advance notice, submits that the documents referred to in the show cause notice dated 22.10.2020 are principally the accounts of the Company itself to which the petitioners had access. As such, he submits that there was no occasion to supply the same documents to the petitioners again. He distinguishes the judgment in Indian Commodity Exchange (supra) on the ground that the Bank is not undertaking judicial or quasi-judicial proceedings for which adherence to the principles of natural justice, as elucidated in the aforesaid judgment, would be required.

(i) Infirmities in the impugned orders

12. Having heard learned counsel for the parties, I am of the view that the matter requires to be remanded to the Bank for reconsideration in view of infirmities in the impugned orders of the two committees. Clause 2.[5] of the Master Circular itself emphasises the importance of transparency in the identification of a “defaulter”, and the checks and balances necessary to avoid misuse of discretionary exercise of power. The interpretation of the Master Circular in Jah Developers (supra) also underscores the requirements of natural justice in the context of the consequences contemplated upon identification as a “wilful defaulter” under the Master Circular. The following observations of the Court are directly applicable: “24. Given the above conspectus of case law, we are of the view that there is no right to be represented by a lawyer in the in-house proceedings contained in Para 3 of the Revised Circular dated 1-7-2015, as it is clear that the events of wilful default as mentioned in Para 2.1.[3] would only relate to the individual facts of each case. What has typically to be discovered is whether a unit has defaulted in making its payment obligations even when it has the capacity to honour the said obligations; or that it has borrowed funds which are diverted for other purposes, or siphoned off funds so that the funds have not been utilised for the specific purpose for which the finance was made available. Whether a default is intentional, deliberate, and calculated is again a question of fact which the lender may put to the borrower in a show-cause notice to elicit the borrower's submissions on the same. However, we are of the view that Article 19(1)(g) is attracted in the facts of the present case as the moment a person is declared to be a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. This is for the reason that no additional facilities can be granted by any bank/financial institutions, and entrepreneurs/promoters would be barred from institutional finance for five years. Banks/financial institutions can even change the management of the wilful defaulter, and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company. Equally, under Section 29-A of the Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant. Given these drastic consequences, it is clear that the Revised Circular, 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. …”

13. The judgment of this Court in Aap Infrastructures (supra) is also instructive as to the requirement of consideration of the noticees’ submissions by the committees constituted under the Master Circular: “13. Insofar as the plea of Mr. Nandrajog that the petitioner in his reply to show cause has admitted the allegations made against it is concerned, the same is not appealing. This I say so, for two reasons; firstly which has already been noted by me above that the copy of the order passed by the First Committee 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.” The Division Bench decision of this Court in Indian Oil Corporation Ltd. Vs. SPS Engineering Ltd. (2006) 128 DLT 417 (paragraph 32) also lays down that an authority is required to deal, at least in brief, with the explanation given in response to a show cause notice.

14. Applying these principles to the facts of the present case, it is clear that both the impugned orders fall short. The order of the Identification Committee dated 04.02.2021 does not reveal any consideration of SP’s reply dated 03.12.2020 to the impugned show cause notice. Without prejudice to his request for supply of documents, the representation offered various responses to the allegations made by the Bank. Although the order of the Identification Committee refers to the submissions of the borrower, it has confirmed the allegations in the show cause notice merely on the basis that the petitioners did not appear for the personal hearing. The judgment in Aap Infrastructure (supra) makes it clear that consideration of the noticees’ response is necessary. The order of the Identification Committee is, under the Master Circular, subject to review, which is characterized by the Supreme Court in Jah Developers as “a full representation on facts and law (if any)”. Such an exercise requires the Identification Committee to give reasons, which are subject to review. A mechanical reproduction of the allegations is, in these circumstances, entirely inadequate.

15. The impugned order of the Review Committee quoted above is similarly laconic. The Review Committee refers to the representations made by the petitioner, but does not record any reasons for coming to the conclusion that there was “unimpeachable evidence/s against the promoters/ directors/ guarantors and their act would fall under the purview of RBI guidelines on "Wilful Defaulter"”. That such an order is unacceptable is beyond the pale of doubt in view of the specific observation in Jah Developers that the Review Committee must pass a reasoned order. Assertion of the Committee’s conclusions cannot substitute for an expression of reasons.

16. For the reasons aforesaid, the impugned orders of the Identification Committee and the Review Committee dated 04.02.2021 and 06.04.2021 respectively are required to be set aside, and the matter remanded to the Bank for a fresh decision in accordance with law.

(ii) Disclosure of documents

17. What remains to be considered is the contention of Mr. Krishnan regarding the supply of documents relied upon in the impugned show cause notice. Clauses 3(a) and (b) of the Master Circular require the Identification Committee to examine the evidence of wilful default on the part of the borrowing company and its promoter/whole-time directors and come to a conclusion as to whether a show cause notice is to be issued. In the present case, the impugned show cause notice reveals that such an exercise was undertaken by the Identification Committee in its meeting on 07.02.2020. The meeting was held on the basis of the recommendation received from “IFB Delhi”. [According to Mr. Gaggar, this refers to the Industrial Finance Branch, Delhi, which was the dealing branch of the Bank.] The allegations against the Company, presumably based on the evidence brought before the Identification Committee, have been set out in the impugned show cause notice.

18. Mr. Krishnan’s contention is that the documents referred to in the show cause notice are required to be supplied to the noticees. For this purpose, he relies upon the following observations in the judgment of the Supreme Court in Indian Commodity Exchange (supra): “32. We have no doubt that a proper show cause notice was served on Respondent No. 2 herein. The moot point, however, remains as to what is the effect of not serving him with the documents he sought for and within the compass of time, which was given to him to respond.

33. Once again, it may be stated that a large part of the documents would have been within the custody of the Respondent No. 2 herein or for that matter with Respondent No. 1 herein. However, this would not encompass all the documents. Not only that, when reliance is placed on as many as 4,000 pages of documents, it would not be fair to expect that the party in question ferrets through its own record trying to locate the documents, when on basis of formation of an opinion for issuance of the show cause notice, logic and requirement of law both would dictate that the show cause notice should be comprehensive enough with full supporting documents being handed over. The answer cannot be that they are free to inspect 4,000 pages on their own! In fact, in so many terms, ultimately most of those documents were made available and it would not be appropriate to go back into the issue of whether the documents should have been supplied or not. In a sense, that chapter closed with the supply of documents on 5.7.2011 even though some more documents were sought thereafter.

34. We fail to appreciate why there should have been a cussedness in handing over mere copies of documents when serious allegations and serious consequences which would flow to the respondents herein. Not only that, the endeavour to conclude the proceedings within a span of two weeks thereafter cannot, in our view, be said to be an adequate opportunity as has been found by the SAT. An opportunity of hearing is not a mere nicety but a valuable right. That it does not fall in a straitjacket formula is no doubt the accepted legal position [Dharampal Satyapal Ltd.].The question is whether there was substantial compliance of the principles of natural justice [Chairman, Board of Mining Examination] and whether there were unnecessary adjournments being sought, which were declined [Titaghur Paper Mills Co. Ltd. and Cement Workers Karamchari Sangh]”

19. In view of the fact that the matter is being remanded to the Bank for a fresh consideration of the issue, it is not necessary to conclusively decide this issue at this stage. Suffice it to say that the Bank is required to disclose the documents and evidence which the Identification Committee has relied upon to arrive at the decision to issue the show cause notice. The disclosure must be such as to enable the noticee to appreciate the scope of the allegations made against it and, if the allegations are based upon documents which the Bank states are already in the possession of the noticee, such as its own accounts, to identify the transactions upon which the Bank seeks to rely.

20. The fundamental principle, as laid down by the Supreme Court in Natwar Singh vs. Director of Enforcement (2010) 13 SCC 255 (paragraph 30) is that “nothing should be used against the person which has not been brought to his notice”. In paragraph 26 of the said judgment, the Court also reiterated the flexible approach to be adopted while considering claims of violation of natural justice. Upon a consideration of the applicable statutory and regulatory scheme, the Court held that the petitioner therein was entitled to the documents relied upon by the authority, but not to other documents in its possession.

21. In the facts of the present case Mr. Gaggar may be correct in submitting that the Bank will not be required to supply copies of the Company’s own accounts to the Company itself. However, at the very least, the transactions based upon which the Bank has arrived at its conclusion must be identifiable from the disclosure. Mr. Krishnan points out that the petitioners in the present case are not the Company itself, which is under the control of a resolution professional, but its erstwhile directors – one who claims to have resigned in 2014 and the other who was a director until the Company went under the resolution process.

22. Mr. Gaggar’s submission regarding the distinction between an administrative decision and a quasi-judicial/ judicial decision does not persuade me to a contrary conclusion. It is now well settled that the principles of natural justice are applicable to administrative decisions as well. Reference may be made, for this purpose, inter alia to the decisions of the Supreme Court in Canara Bank vs. Debasis Das (2003) 4 SCC 557 (paragraph 19) and Manohar vs. State of Maharashtra (2012) 13 SCC 14 (paragraph 17). The determination rests not upon such a classification of the decision, but upon the entire statutory scheme, the nature of the inquiry and other relevant factors, as indicated, by way of example, in paragraph 26 of Natwar Singh (supra).

23. As the proceedings are being remanded to the Bank, it is for the Bank to take a call as to the extent of disclosure required in law, if any, bearing the aforesaid observations in mind. The rights and contentions of the parties in this regard are reserved.

24. The petitions are therefore disposed of with the following directions: a. The impugned orders of the Identification Committee and the Review Committee dated 04.02.2021 and 06.04.2021 respectively are set aside. b. The matter is remanded to the Identification Committee of the Bank for a fresh decision pursuant to the impugned show cause notice dated 22.10.2020. c. Prior to the Identification Committee taking a fresh decision, the Bank will address a communication to the petitioners disclosing any documents which it considers necessary in accordance with law, or alternatively stating its conclusion that no further disclosure of documents is required. d. The Bank will give the petitioner at least 15 days’ time to submit an additional representation after the aforesaid communication. e. The Bank will also give the petitioners an opportunity of a personal hearing before the Identification Committee, which may pass a fresh order in accordance with law thereafter. f. In the event the Identification Committee reaches a conclusion adverse to the petitioners, the petitioners will have 15 days’ time to submit a representation for consideration of the Review Committee, which will thereafter proceed in accordance with the procedure laid down in law, and give a reasoned decision. g. The question of adequacy of the disclosure made by the Bank pursuant to this judgment is left open. h. It is made abundantly clear that this Court has not expressed any opinion on the merits of the parties’ contentions.

25. The pending applications are also disposed of.

PRATEEK JALAN, J MAY 13, 2021 ‘hkaur’