IN THE HIGH COURT OF JUDICATURE AT MADRAS DATED: 24.6.2009 CORAM: THE HONOURABLE MR.JUSTICE P.JYOTHIMANI W.P.No.6461 of 2009 Subhiksha Trading Services Limited Habib Complex, 6th Floor No.5, Durgabai Deshmukh Road R.A.Puram, Chennai-600 028 rep. by its Company Secretary M.Rathinakumar .. Petitioner Vs. 1. Kotak Mahindra Bank Limited 7th Floor, Dani Corporate Park No.158, C.S.T.Road Kalina, Santacruz (E) Mumbai 400 098. 2. Reserve Bank of India Fort Glacis, Rajaji Salai Chennai 600 001. 3. Credit Information Bureau (India) Limited Hoechst House, 6th Floor 193, Backbay Reclamation Nariman Point, Mumbai-400 021 .. Respondents PRAYER: Petition under Article 226 of the Constitution of India for issue of a writ of Certiorarified Mandamus as stated herein. For Petitioner : Mr.Prakash Goklaney For Respondents : M/s.Aiyar & Thomas for 1st respondent Mr.Rishi Kumar for 3rd respondent ORDER
This writ petition is filed challenging the order of the first respondent dated 31.3.2009, by which the first respondent has declared the petitioner as wilful defaulter, as per the Master Circular DBOD No.DL.BC.1/20.16.003/2008-09, dated 1.7.2008.
2. The brief facts leading to the filing of this case are that the petitioner, which is a company started for the purpose of operating a large number of small stores selling day to day use goods, has availed certain loans from the first respondent/Bank. It is stated that the loans originally availed have been repaid to the extent of Rs.15 Crores and ultimately, fresh facilities were granted by the first respondent sometime in December, 2006, which was subsequently enhanced to Rs.50 Crores, stated to be on the basis of the good performance of the petitioner company. It appears that the petitioner has failed to repay instalments due and an application for winding up was attempted to be moved under Section 433 of the Companies Act against the petitioner/Company.
3. In the meantime, the first respondent has also given a show cause notice to the petitioner on 27.1.2009, calling upon the petitioner to show cause as to why the petitioner/ Company should not be declared as a wilful defaulter as per the Reserve Bank of India circular dated 1.7.2008. The petitioner/Company gave its reply on 13.2.2009. The contents of the reply are that due to financial crisis and economic recession there was inability to repay the amount. Subsequently, on 7.3.2009, the first respondent has passed an order proposing to declare the petitioner/Company as a wilful defaulter, as per the said circular of the Reserve Bank of India. In the said order, the first respondent has also informed the petitioner that the reply submitted by the petitioner dated 13.2.2009 to the original show cause notice dated 27.1.2009 has been forwarded to the Grievance Redressal Committee of the Bank for further consideration and the Committee would decide after hearing on 23.3.2009.
4. It appears that the petitioner has issued a legal notice dated 13.3.2009 addressed to the first respondent Bank, but posted the same on 18.3.2009, which is stated to have been received by the first respondent on 23.3.2009, requiring the first respondent Bank to furnish some of the documents, which are relevant for the purpose of facing an enquiry by the Committee. In a telegram dated 22.3.2009, the petitioner has informed the first respondent Bank that attempt is being made to threaten them by declaring them as wilful defaulter illegally.
5. It was by order dated 31.3.2009, which is impugned in this writ petition, the first respondent has informed the petitioner about the decision of the Grievance Redressal Committee of the Bank taken on 23.3.2009, declaring the petitioner as wilful defaulter, as per circular of the Reserve Bank of India dated 1.7.2008. In the impugned order, it is further stated that the Committee has also resolved that the name of the Company and its Directors be reported to Credit Information Bureau (India) Limited, Reserve Bank of India or such other institution/ agency as may be required by Reserve Bank of India in terms of its Master Circular, as wilful defaulter.
6. The impugned order of the first respondent is challenged mainly on the ground that even though the petitioner by a legal notice dated 13.3.2009 has required some of the vital documents for the purpose of effectively defending itself before the Grievance Redressal Committee, the first respondent has not chosen to furnish the required documents and as a result, it was not possible for the petitioner to participate in the enquiry conducted by the Grievance Redressal Committee and ultimately, the Grievance Redressal Committee, without hearing the petitioner, has passed an order declaring the petitioner as wilful defaulter in terms of the said circular. It is his submission that there is violation of principles of natural justice and violation of the concept of audi alteram partem.
7. On the other hand, in the counter affidavit filed by the first respondent, it is stated that the petitioner/ Company, which has been started for the purpose of operating a large number of small stores selling day to day use goods throughout the State, has started siphoning funds for illegal purposes. It is specifically stated that the entire stocks worth more than Rs.800 Crores have disappeared suddenly and there was no proper explanation by the petitioner and that itself is a ground to treat the petitioner Company as a wilful defaulter, acting against the public interest.
8. It is further stated in the counter affidavit that the petitioner Company has siphoned Rs.230 Crores from the Company for the purpose other than the purpose for which the Company was constituted. It is the further case of the first respondent that in spite of the notice on 7.3.2009 informing the petitioner that the first respondent is proposing to declare the petitioner as wilful defaulter, the petitioner has failed to appear before the Grievance Redressal Committee or submit proper explanation. Thus, it is contended that the petitioner having been given an opportunity has not availed the same and therefore, the concept of audi alteram partem will not arise. It is also stated that inasmuch as the petitioner has siphoned huge amount of public money, there is no grievance to the petitioner and the giving an opportunity would only be an empty formality. When once opportunity has been given to the petitioner and petitioner failed to avail the opportunity, he cannot now complain about the violation of principles of natural justice.
9. Mr.Prakash Goklaney, learned counsel appearing for the petitioner would submit that as far as declaring petitioner Company, a borrower, as a wilful defaulter is concerned, the same is protected by the rules of the Reserve Bank of India, which prescribe a particular procedure to be followed, since, in effect, declaring a borrower as a wilful defaulter by the Grievance Redressal mechanism would amount to imposing a disqualification, which takes away the right of the parties and the procedure having not been followed by the first respondent, the declaration of the first respondent, declaring the petitioner as wilful defaulter is basically wrong.
10. On the other hand, it is the contention of the learned counsel for the first respondent, by relying upon the judgment of the Supreme Court in State Bank of Patiala v. S.K.Sharma,  3 SCC 364 and I.J.Rao, Assistant Collector of Customs v. Bibhuti Bhushan Bagh,  3 SCC 202, that the principles of natural justice are to be decided based on the prejudice and in the present case, there is no prejudice caused to the petitioner since the opportunity that has been given to the petitioner has not been utilised and therefore, relying upon the judgments of the Supreme Court, the contention of the first respondent is that the technical defect would not stand in the way to decide the issue on merit.
11. Heard the learned counsel for the petitioner and the learned counsel for the respondents and perused the entire records.
12. Since the facts, which are enumerated above, are not in dispute, it is relevant to consider the provisions of the Master Circular DBOD No.DL.BC.1/20.16.003/2008-09, dated 1.7.2008. In the first instance, the circular explains “wilful default” as one which broadly covers the following:
“a. Deliberate non-payment of the dues despite adequate cash flow and good networth;
b. Siphoning off of funds to the detriment of the defaulting unit;
c. Assets financed either not been purchased or been sold and proceeds have misutilised;
d. Misrepresentation / falsification of records;
e. Disposal / removal of securities without bank’s knowledge;
f. Fraudulent transactions by the borrower.”
13. The term “wilful default” has been defined in Clause 2.1 as follows:
“A “wilful default” would be deemed to have occurred if any of the following events is noted:-
(a) The unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations.
(b) The unit has defaulted in meeting its payment/repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes.
(c) The unit has defaulted in meeting its payment/repayment obligations to the lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment/repayment obligations to the lender and has also disposed off or removed the movable fixed assets or immovable property given by him or it for the purpose of securing a term loan without the knowledge of the bank/lender.”
14. A reading of the term makes it clear that what is intended to be defined under the Reserve Bank of India circular is not merely a default committed by the borrower, but a default in repayment obligations to the lender even when it has the capacity to honour the obligations. Of course, the term “Diversion and Siphoning of Funds” has also been defined under the Circular in Clause 2.2. Unfortunately, on the facts of the case, at the first instance, when a show cause notice was given by the first respondent on 27.1.2009, the contents of the show cause notice only state that the petitioner has regularly failed payment of interest in respect of the said amount and had not complied with the requirement of earlier demand dated 21.11.2007 and failed to pay interest continuously for a period of three months, which is in violation of the pari passu lending terms. There is a reference about the diversion of some of the stocks, etc. however, without giving any particulars. The show cause notice proceeds on the basis that the non payment of the instalments by the borrower can be deemed to be a wilful default as per the circular and it was with that view the said show cause notice was given to the petitioner calling upon the petitioner to submit his reply for the various allegations made against the petitioner.
15. In the reply sent by the petitioner to the show cause notice issued by the first respondent, the petitioner has stated that due to rapid expansion of the project and due to recession, which started from August, 2008 there was inability on the part of the petitioner to honour the tie up with the working capital gap in respect of the bank credits. It is also denied that any amount has been siphoned for improper purpose. It is also specifically stated that non payment of interest to the Bank was not intentional and the same was due to various reasons which are explained therein and therefore, the petitioner has stated that there is no wilful default in the repayment of amount.
16. On receipt of the said explanation, the first respondent has issued a notice on 7.3.2009, in which the first respondent, having satisfied based on the conduct of the petitioner that the petitioner is liable to be declared as wilful defaulter, since the amounts have not been paid and various amounts have been siphoned, has, in fact, directed the petitioner to appear before the Grievance Redressal Committee. As submitted by the learned counsel for the petitioner, it is true that in this letter, which can at the most be taken as the first step taken by the Bank in furtherance of the action to declare the borrower as wilful defaulter, it is not stated in particular about the conduct of the petitioner to presume the petitioner to be declared as wilful defaulter.
17. In this regard, let us now refer to the grievance redressal mechanism as given under the Reserve Bank of India guidelines. The guidelines contemplate the grievance redressal mechanism in the following terms:
“(i) With a view to imparting more objectivity in identifying cases of wilful default, decisions to classify the borrower as wilful defaulter should be entrusted to a Committee of higher functionaries headed by the Executive Director and consisting of two Gms/DGMs as decided by the Board of the concerned bank/FI.
(ii) The decision taken on classification of wilful defaulters should be well documented and supported by requisite evidence. The decision should clearly spell out the reasons for which the borrower has been declared as wilful defaulter vis-a-vis RBI guidelines.
(iii) The borrower should thereafter be suitably advised about the proposal to classify him as wilful defaulter along with the reasons therefor. The concerned borrower should be provided reasonable time (say 15 days) for making representation against such decision, if he so desires, to a Grievance Redressal Committee headed by the Chairman and Managing Director and consisting of two other senior officials.
(iv) Further, the above Grievance Redressal Committee should also give a hearing to the borrower if he represents that he has been wrongly classified as wilful defaulter.
(v) A final declaration as ‘wilful defaulter’ should be made after a view is taken by the Committee on the representation and the borrower should be suitably advised.”
18. A reference to the provision makes it clear that in cases where the bank desires to identify a borrower as a wilful defaulter, the first step to be taken is a decision taken to classify a borrower as a wilful defaulter, which should be supported by documents and such decision should clearly spell out the reasons for which the borrower has been declared as wilful defaulter as per the Reserve Bank of India guidelines.
19. The said notice dated 7.3.2009 issued by the first respondent Bank directing the petitioner to appear before the Grievance Redressal Committee, having come to a conclusion that there are materials to show that the petitioner should be declared as wilful defaulter, certainly confirms to the requirement of the first stage of the grievance redressal mechanism. In the first stage, the only requirement for the bank is that the bank must be satisfied that the conduct of the borrower is to be declared as per the Reserve Bank Guidelines as a wilful defaulter, which is supported by requisite evidence.
20. On a reading reading of the said clause, it is clear that it is not necessary on the part of the Bank to disclose what are the materials, which have guided the bank to come to the conclusion that the borrower has become a wilful defaulter. It is the subjective satisfaction of the first respondent to come to an initial conclusion. Therefore, the contention of the learned counsel for the petitioner that the notice dated 7.3.2009 does not contain the concrete proof to show the satisfaction of the first respondent to declare the petitioner as wilful defaulter is not sustainable.
21. As far as the second step is concerned, after issuing such notice, the borrower should be suitably advised about the proposal to classify him as a wilful defaulter and he must be provided with reasonable time, at least 15 days time, for making his representation against such decision, if he desires and such representation must be directed to be made not to the Bank, but to the Grievance Redressal Committee headed by the Chairman and Managing Director and consisting of two other senior officials.
22. In the first stage, by letter dated 7.3.2009, the first respondent has directed the petitioner to appear before the Grievance Redressal Committee in the meeting to be held on 23.3.2009. In the letter of the petitioner dated 13.3.2009, given by way of legal notice, the petitioner has requested the first respondent Bank to give copies of various documents, which are as follows:
“1. Copies of all material perused by the said committee and relied upon in passing the said order along with copy of the order claimed to be passed by the said committee in this regard and reasoning thereof, if any.
2. Copy of circular on the process set up to be followed by your Bank for classifying a company as a Wilful Defaulter and the details of the Committees process of redressing grievances against decisions thereof within the Bank and the composition of the First level committee.
3. Copy of the circular of your Bank on the constitution of the Grievance Committee and the powers vested with such committee and process of redressing grievances against decisions thereof within the Bank and the composition of this committee.”
23. It is not in dispute that even though the said legal notice is dated 13.3.2009, the same has been sent by post only on 18.3.2009 and received by the first respondent bank on 23.3.2009, and on the date of the meeting of the Grievance Redressal Committee, the said letter has been received by the first respondent Bank. It is also not in dispute that the said copies of documents sought for by the petitioner have not been furnished to the petitioner and on the same day, viz., 23.3.2009, the Grievance Redressal Committee has proceeded with enquiry exparte and resolved to declare the petitioner as a wilful defaulter.
24. It is in this process of the second and final stage the first respondent has not acted as per the provisions of the Reserve Bank of India guidelines as elicited above. The guidelines make it very clear that when once the defaulter desires to defend himself before the Grievance Redressal Committee and such desire has been explained by the petitioner by way of legal notice dated 13.3.2009, it was certainly incumbent on the part of the first respondent or the Grievance Redressal Committee to forward all the required documents facilitating the petitioner to effectively defend himself against the allegation. This second aspect is really the crux of the rule, which has incorporated the celebrated concept of principles of natural justice. It is not merely the principles of audi alteram partem, which the provision contemplates, there is a positive obligation on the part of the Grievance Redressal Committee to provide reasonable opportunity to a person to be declared as a defaulter, before declaring him as defaulter. The reason appears to be that by declaring a borrower as wilful defaulter, there may be future disability imposed on him while approaching financial institutions. That is why the Reserve Bank of India guidelines contemplate that before declaring the petitioner as wilful defaulter, the procedure formulated is to be complied with. Therefore, the contention of the first respondent that any procedural technical infirmity should not stand in the way has no meaning. That may be a good defence if there is no express term conferring principles of natural justice to the parties, but on the terms and conditions of the Reserve Bank of India guidelines, there is an explicit provision wherein principles of natural justice are directed to be followed by the procedure contemplated under the Rule.
25. In such view of the matter, it is not possible to agree with the contention of the learned counsel for the first respondent that there is no prejudice caused to the petitioner. Whether prejudice is caused or not is to be decided by the Grievance Redressal Committee, but that may be possible only if an opportunity is given to the petitioner.
26. On the facts of the present case, when the petitioner required production of copies of certain documents desiring to defend himself, it is the duty of the Grievance Redressal Committee to furnish documents. Non furnishing of the documents sought for and passing exparte order, especially in the circumstances when a letter requesting submission of documents has been received by the first respondent, certainly is a violation of principles of natural justice.
27. The learned counsel for the first respondent relied upon the decision in State Bank of Patiala v. S.K.Sharma,  3 SCC 364, which relates to service law, where the Supreme Court has distinguished the categories of “no notice”, “no opportunity” and “no hearing” and held that in the absence of a regulation or rule providing for such notice or opportunity or hearing, the Court has to go into the theory of prejudice and find out by whether any prejudice has been caused to the delinquent officer at all. The Supreme Court has summarised the entire law on the issue in respect of audi alteram partem and principles of natural justice as follows:
“33. We may summarise the principles emerging from the above discussion. (These are by no means intended to be exhaustive and are evolved keeping in view the context of disciplinary enquiries and orders of punishment imposed by an employer upon the employee):
(1) An order passed imposing a punishment on an employee consequent upon a disciplinary/ departmental enquiry in violation of the rules/regulations/statutory provisions governing such enquiries should not be set aside automatically. The Court or the Tribunal should enquire whether (a) the provision violated is of a substantive nature or (b) whether it is procedural in character.
(2) A substantive provision has normally to be complied with as explained hereinbefore and the theory of substantial compliance or the test of prejudice would not be applicable in such a case.
(3) In the case of violation of a procedural provision, the position is this: procedural provisions are generally meant for affording a reasonable and adequate opportunity to the delinquent officer/employee. They are, generally speaking, conceived in his interest. Violation of any and every procedural provision cannot be said to automatically vitiate the enquiry held or order passed. Except cases falling under no notice, no opportunity and no hearing categories, the complaint of violation of procedural provision should be examined from the point of view of prejudice, viz., whether such violation has prejudiced the delinquent officer/employee in defending himself properly and effectively. If it is found that he has been so prejudiced, appropriate orders have to be made to repair and remedy the prejudice including setting aside the enquiry and/or the order of punishment. If no prejudice is established to have resulted therefrom, it is obvious, no interference is called for. In this connection, it may be remembered that there may be certain procedural provisions which are of a fundamental character, whose violation is by itself proof of prejudice. The Court may not insist on proof of prejudice in such cases. As explained in the body of the judgment, take a case where there is a provision expressly providing that after the evidence of the employer/government is over, the employee shall be given an opportunity to lead defence in his evidence, and in a given case, the enquiry officer does not give that opportunity in spite of the delinquent officer/employee asking for it. The prejudice is self-evident. No proof of prejudice as such need be called for in such a case. To repeat, the test is one of prejudice, i.e., whether the person has received a fair hearing considering all things. Now, this very aspect can also be looked at from the point of view of directory and mandatory provisions, if one is so inclined. The principle stated under (4) hereinbelow is only another way of looking at the same aspect as is dealt with herein and not a different or distinct principle.
(4)(a) In the case of a procedural provision which is not of a mandatory character, the complaint of violation has to be examined from the standpoint of substantial compliance. Be that as it may, the order passed in violation of such a provision can be set aside only where such violation has occasioned prejudice to the delinquent employee.
(b) In the case of violation of a procedural provision, which is of a mandatory character, it has to be ascertained whether the provision is conceived in the interest of the person proceeded against or in public interest. If it is found to be the former, then it must be seen whether the delinquent officer has waived the said requirement, either expressly or by his conduct. If he is found to have waived it, then the order of punishment cannot be set aside on the ground of the said violation. If, on the other hand, it is found that the delinquent officer/employee has not waived it or that the provision could not be waived by him, then the Court or Tribunal should make appropriate directions (include the setting aside of the order of punishment), keeping in mind the approach adopted by the Constitution Bench in B. Karunakar. The ultimate test is always the same, viz., test of prejudice or the test of fair hearing, as it may be called.
(5) Where the enquiry is not governed by any rules/regulations/ statutory provisions and the only obligation is to observe the principles of natural justice or, for that matter, wherever such principles are held to be implied by the very nature and impact of the order/action the Court or the Tribunal should make a distinction between a total violation of natural justice (rule of audi alteram partem) and violation of a facet of the said rule, as explained in the body of the judgment. In other words, a distinction must be made between no opportunity and no adequate opportunity, i.e., between no notice/no hearing and no fair hearing. (a) In the case of former, the order passed would undoubtedly be invalid (one may call it void or a nullity if one chooses to). In such cases, normally, liberty will be reserved for the Authority to take proceedings afresh according to law, i.e., in accordance with the said rule (audi alteram partem). (b) But in the latter case, the effect of violation (of a facet of the rule of audi alteram partem) has to be examined from the standpoint of prejudice; in other words, what the Court or Tribunal has to see is whether in the totality of the circumstances, the delinquent officer/employee did or did not have a fair hearing and the orders to be made shall depend upon the answer to the said query. [It is made clear that this principle (No. 5) does not apply in the case of rule against bias, the test in which behalf are laid down elsewhere.]
(6) While applying the rule of audi alteram partem (the primary principle of natural justice) the Court/Tribunal/Authority must always bear in mind the ultimate and overriding objective underlying the said rule, viz., to ensure a fair hearing and to ensure that there is no failure of justice. It is this objective which should guide them in applying the rule to varying situations that arise before them.
(7) There may be situations where the interests of State or public interest may call for a curtailing of the rule of audi alteram partem. In such situations, the Court may have to balance public/State interest with the requirement of natural justice and arrive at an appropriate decision.”
28. On applying the concept of audi alteram partem, as explained by the Supreme Court, to the facts and circumstances of this case, it is clear that in the present case when the Reserve Bank of India regulations have expressly provided for an opportunity to be given to the party before declaring him as Wilful Defaulter and such opportunity has not been provided, I am of the considered view that the judgment relied upon by the learned counsel for the first respondent is not applicable.
29. Likewise, the judgment reported in I.J.Rao, Assistant Collector of Customs v. Bibhuti Bhushan Bagh,  3 SCC 202, which was a case that arose from the Customs Act, the Supreme Court has considered about the obligation of the authority to issue pre-decisional notice under the Customs Act, whether the proceeding be judicial, quasi-judicial or administrative in nature. The Supreme Court has ultimately held “there can be no right in any person to be informed midway, during an investigation, of the material collected in the case against him. In that sense, the opportunity which the law can contemplate upon notice to him of the application for extension must be limited by the pragmatic necessities of the case.”
30. The contention of the learned counsel for the first respondent relying upon the said finding of the Supreme Court in the above said case, is that the petitioner, having been given an opportunity earlier to submit his materials and appear before the Grievance Redressal Committee having chosen not to appear, cannot now find fault with the first respondent. However the decision of the Supreme Court relates to a case, where during the course of investigation some information is received against the party and therefore, there is no right in any person to be informed of such material collected during the course of investigation. That would not arise in the facts and circumstances of the present case.
31. In such view of the matter, the impugned order of the first respondent is set aside, however making it clear that the first step taken by the first respondent by giving notice on 7.3.2009 will continue to be followed and it is for the first respondent to furnish the documents which are required by the petitioner as per the legal notice dated 13.3.2009, as elicited above, and such documents shall be furnished to the petitioner within a period of 10 days from the date of receipt of copy of this order. The petitioner shall within ten days thereafter submit his explanation and on receiving the explanation the Grievance Redressal Committee of the first respondent shall fix a date for hearing and give opportunity to the petitioner and pass appropriate orders as per the above said guidelines.
This writ petition is ordered accordingly. No costs. Consequently, M.P.No.1 of 2009 is closed.
1. Reserve Bank of India
Fort Glacis, Rajaji Salai
Chennai 600 001.
2. Credit Information Bureau
Hoechst House, 6th Floor
193, Backbay Reclamation
Mumbai 400 021