Banks And Financial Institutions Declaring Occurrence Of Wilful Default Must Share Reasoned Orders: Bombay High Court

The Bombay High Court observed that the banks and financial institutions while declaring occurrence of wilful default must share reasoned orders.

The Court observed thus in a writ petition seeking various declaratory reliefs by which adherence to principles of natural justice including provision of inspection of relevant material was sought to read into the due process stipulated by the Reserve Bank of India (RBI) in connection with declaration of bodies corporate, their promoters, and directors as “wilful defaulter”.

A Division Bench comprising Justice B.P. Colabawalla and Justice Somasekhar Sundaresan held, “Banks and financial institutions that seek to invoke the Master Circular to declare occurrence of wilful default, must identify the members of the Identification Committee and the members of the Review Committee, and share the reasoned orders passed by such committees. In the instant case, the SCN, the hearing notice and the final order are all signed by the same individual, who purports to communicate them, with no clarity on who were the persons who conducted the hearing and who were the persons who passed the orders”

Advocate Rohaaan Cama appeared for the petitioner while Advocate Jamshed Ansari appeared for the respondents.

Factual Background -

The petitioner was a former Joint Managing Director of IL&FS Financial Services Limited (IFIN), a wholly-owned subsidiary of Infrastructure Leasing & Financial Services Limited (ILFS). He worked with ILFS since June 1993, except for a brief period between February 2003 and August 2005. He was eventually designated as a Joint Managing Director of IFIN with effect from April 1, 2014. He ceased to be in the services of IFIN with effect from March 31, 2018. His role as a “whole time director” of IFIN was up for consideration by the Union Bank of India in proceedings to declare IFIN, and consequently him, as wilful defaulters. IFIN and the petitioner were served with a common show cause notice by the Union Bank, which had sanctioned credit limits aggregating to Rs. 175 Crores to IFIN.

The SCN stated that Union Bank had formed a prima facie view that IFIN and the petitioner deserved to be declared as wilful defaulters in connection with the facilities sanctioned to IFIN. The SCN set out nine broad heads of reasons to allege diversion and siphoning of funds by IFIN in the context of default by IFIN in servicing the indebtedness owed to Union Bank. Some of the heads of reasons were generic in nature, even while other heads of reasons made reference to specific amounts involved, and specific number of instances of allegedly deviant conduct by IFIN. The SCN did not set out any detail of the petitioner’s individual involvement in the nine heads of reasons, except for identification of the petitioner as a noticee in his capacity as a “whole time director”. No other whole-time director or promoter was a noticee in the SCN.

The High Court in the above context of the case noted, “In these circumstances, after having heard the submissions of the parties, we put it to the learned counsel for Union Bank to ask his client to consider recalling the orders of the Identification Committee and the Review Committee, with liberty to conduct the proceedings afresh from the stage of the SCN, after providing proper access to the relevant material. After review of our suggestion, Union Bank, whose officials are also present in court today, have fairly instructed learned counsel to state that the orders of the Identification Committee and the Review Committee may be considered as withdrawn, with liberty to continue the proceedings from the stage of the SCN, and that Union Bank would provide the Petitioner full access to the relevant documents and the relevant material on record.”

The Court granted liberty to Union Bank to make a proper disclosure of materials and information on which the SCN is based. It added that once such disclosure is made to the petitioner, he is at liberty to submit a fresh reply to the SCN, after which a reasoned draft order may be issued by the Identification Committee.

“This draft order of the Identification Committee shall be served on the Petitioner so as to enable him to make his representation to the Review Committee why the said order ought not to be confirmed. Thereafter, a reasoned final order may be passed by the Review Committee, if it is found that there has been a wilful default attributable to the Petitioner. … We are not foreclosing a fair and effective determination of the truth by Union Bank, for which it would be required to comply with due process of law and adhere to principles of natural justice, and give a full run to a transparent mechanism as mandated by the RBI”, it further said.

The Court permitted the Union Bank to withdraw the final order passed by the Review Committee as also the draft order purported to have been passed by the Identification Committee, insofar as it relates to the petitioner. It also granted liberty to Union Bank to supply all the material underlying the SCN and relevant to arrive at a finding on the petitioner’s role in the alleged wilful default.

“The Petitioner is granted liberty to provide a reply to the SCN after appreciation of the material disclosed by Union Bank … After giving a personal hearing to the Petitioner, the Identification Committee of Union Bank must deal with the Petitioner’s fresh reply and his submissions, that may be made after having reviewed the material relevant for dealing with the SCN”, it further ordered.

The Court also directed that any agency, including respondents, that has published or disseminated the name of the petitioner identifying him as a wilful defaulter on the strength of the orders that now stand withdrawn by Union Bank, shall forthwith remove such identification from publicly accessible information resources.

Accordingly, the High Court disposed of the writ petition.

Cause Title- Milind Patel v. Union Bank of India & Ors. (Neutral Citation: 2024:BHC-OS:4430-DB)

Appearance:

Petitioner: Advocates Rohaan Cama, Pheroze F. Mehta, and Dastur Kalambi & Associates.

Respondents: Advocates Jamshed Ansari, Prasad Shenoy, Vijay Salokhe, V. Mannadiar, Dhannya Prasad, V. Mannadiar & Co., Garima Singh, MLS Vani & Associates, Mohit Sahani, Meiron Damania, and Pamela Dalal.

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