The Bombay High Court (“Bombay High Court”), vide its judgement dated March 4, 2024, in the case of Milind Patel v. Union Bank of India and Others [2024 SCC OnLine Bom 745], has held that banks and financial institutions must provide a reasoned order before declaring the occurrence of a wilful default by an entity or individual.

Facts

Mr. Milind Patel (“Petitioner”) was a joint managing director in the whole-time employment of IL&FS Financial Services Limited (“IFIN”). IFIN and the Petitioner were served with a common show cause notice dated July 5, 2022 (“SCN”) by the Union Bank of India (“Union Bank”), which had sanctioned credit limits to IFIN aggregating to INR 175 Crores. 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, alleging diversion and siphoning of funds by IFIN, amongst other reasons. There were certain references to specific amounts involved and number of instances of allegedly deviant conduct by IFIN. However, the SCN did not set out details of the Petitioner’s involvement in the 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 Reserve Bank of India (“RBI”), vide its master circular on wilful defaulters dated July 1, 2015 (“Master Circular”), provides that to declare a person as a wilful defaulter, the evidence of wilful default on the part of the borrower and its whole time director should be examined by an identification committee. If the identification committee concludes that wilful default has occurred, a show cause notice must be issued to the borrower and its whole-time director(s) and call for an explanation. After considering the submissions in reply, and providing an opportunity of being heard (should the identification committee feel such an opportunity is necessary), a reasoned order recording the wilful default must be issued. The order passed by the identification committee will be confirmed by the review committee. The Master Circular also states that it is ‘imperative’ for banks and financial institutions to put in place a transparent mechanism for the entire process so that the penal provisions are not misused and the scope of such discretionary powers are kept to the bare minimum.

In the present case, Union Bank did not enclose any of the material or records in the SCN. Therefore, the Petitioner sought a copy of the material available with Union Bank, vide a letter dated July 12, 2022. The Petitioner also made submissions on the scope of his responsibilities in IFIN to state that since March 2014, his role fundamentally changed from overseeing lending business to overseeing equity investments and advisory operations. The Petitioner did not get a response to this request, however, Union Bank issued a hearing notice to the Petitioner, giving him an opportunity of being heard. The Petitioner reiterated his request for the underlying documents, information and other material, in order to effectively deal with the allegations contained in the SCN, however, it was not responded by Union Bank. On August 5, 2022, the Petitioner participated in a personal hearing, and on August 15, 2022, filed his written submissions pursuant to the personal hearing.

On February 28, 2023, Union Bank issued the final order passed by the review committee (“Final Order”) to confirm that the Petitioner has been identified as a wilful defaulter. The Final Order asserted that the identification committee had passed an order at its meeting held on August 5, 2022 and that such order had been conveyed to the Petitioner on September 8, 2022. Therefore, the identification committee did not consider the detailed written submissions made by the Petitioner on August 15, 2022.

Further, vide a letter dated November 2, 2023, the Petitioner protested against non-receipt of the identification committee’s draft order and asserted that the Final Order was in violation of the inherent safeguards contained in the Master Circular, and the basic principles of natural justice had been violated. The Petitioner, therefore, sought rescission of the Final Order, and sought an opportunity of personal hearing before the review committee, after being served with draft order of the identification committee. There was no response from Union Bank to these requests from the Petitioner.

Therefore, aggrieved by the order of the identification committee and the Final Order, the Petitioner filed a writ petition before the Bombay High Court, seeking intervention, inter alia, by way of a declaration that all documents referred to and relied upon in the SCN ought to be provided and seeking the quashing of the Final Order.

Issue

Whether the order passed by the identification committee and the Final Order were in accordance with the Master Circular and sustainable under law.

Arguments

Contentions of the Petitioner:

The Petitioner argued that he was not served with a copy of the draft order prepared by the identification committee and despite several requests, was not provided with underlying documents, information and other material based on which the orders were passed by the identification committee and the review committee.

Contentions of Union Bank:

Union Bank argued that it was not obligated to provide any material to prove its allegations and that the onus was on the Petitioner to prove his innocence.

Observations of the Bombay High Court

Bombay High Court, without going into the merits of whether IFIN, and thereby the Petitioner, are guilty of committing wilful defaults, observed that RBI has mandated that the evidence of wilful default must be examined by the bank. The Bombay High Court noted that in proceedings that can inflict serious civil consequences on any citizen, the noticee should be able to appreciate the case made out against him so that he may deal with the allegations to the best of his ability. The only means of doing so is to provide detailed and proper notice of the reasons for having formed a prima facie view when calling upon the noticee to show cause why such prima facie view must not translate into a final view.

Bombay High Court cited the case of T. Takano v. Securities and Exchange Board of India and Another [(2022) 8 SCC 162] (“Takano judgement”) where the Supreme Court has summarized the relevance of disclosure of information and records underlying the allegations. The Supreme Court observed that disclosure of information serves 3 purposes; first is reliability, as it aids the courts in determining the truth of the contentions of the parties. Second is fair trial, as it allows the parties to effectively participate in the proceedings. Third is transparency and accountability, since the principles of fairness and transparency of adjudicatory proceedings are the cornerstones of the principle of open justice. The Supreme Court has observed that as a default rule, all relevant material must be disclosed.

Bombay High Court observed that the Takano judgement throws light on how the Master Circular must be construed. The avoidance of information asymmetry and the means of ensuring transparency as outlined in Takano judgement would necessarily mean that principles of natural justice, including the need to provide the underlying material, are inherent and implicit in the process stipulated under the Master Circular. Bombay High Court noted that the objective of the proceedings initiated by issuance of a show cause notice is to arrive at the truth as to whether or not an individual in question is to be subjected to penal consequences. Bombay High Court further noted that fair and transparent symmetrical access to information would mean providing access to not only incriminating material but also exculpatory material, since all such information would be relevant for arriving at the truth.

Bombay High Court further observed that while IFIN may have been declared a wilful defaulter, there is no analysis of evidence at the relevant time demonstrating the role of the Petitioner for holding him to be individually responsible. In these circumstances, it was evident that the Final Order, which was a near-verbatim reproduction of the SCN, was against the constitutional protections available under the rule of law in India and in violation of the ‘imperative’ requirements of transparency stipulated by in the Master Circular.

Decision of the Bombay High Court

Bombay High Court ordered Union Bank to consider recalling the order of the identification committee and the Final Order, with liberty to conduct the proceedings afresh from the stage of the SCN, after providing proper access to the relevant material to the Petitioner. The Petitioner will then be at liberty to submit a fresh reply to the SCN, after which a reasoned draft order may be issued by the identification committee. Bombay High Court also ordered Union Bank to serve the draft order of the identification committee on the Petitioner. 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. Bombay High Court ruled that the banks and financial institutions that seek to invoke the Master Circular, must identify the members of the identification committee and the members of the review committee, and share the reasoned orders passed by such committees.

Further, Bombay High Court also directed the agencies who have published the name of the Petitioner identifying him as a wilful defaulter to forthwith remove such identification from publicly accessible information resources.

VA View:

The Master Circular provides that it is ‘imperative’ for banks and financial institutions to put in place a transparent mechanism while declaring occurrence of wilful default to ensure that the penal provisions are not misused and the scope of such discretionary powers are kept to the bare minimum.

In light of the same, Bombay High Court has rightly ruled that banks should be transparent with alleged defaulters, and provide all the relevant facts that would form the basis of determination of a wilful default. The absence of transparency would render the exercise of discretion to be arbitrary. Therefore, in accordance with the rule of law, banks must pass a reasoned order in such cases.

For any query, please write to Mr. Bomi Daruwala at [email protected]

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