IMPORTANT POINT
The central legal point established in the judgment is the requirement for a transparent mechanism and adherence to principles of natural justice in the process of declaring wilful defaulters, as mandated by the Master Circular on Wilful Default.

JUDGMENT :

Somasekhar Sundaresan, J.

1. Rule. By consent, rule is made returnable forthwith, and the writ petition is taken up for final hearing and disposal.

Show Cause Notice and Context:

2. This Petition seeks various declaratory reliefs whereby adherence to principles of natural justice, including provision of inspection of relevant material, is sought to be read into the due process stipulated by the Respondent No. 2, the Reserve Bank of India (“RBI”), in connection with declaration of bodies corporate, their promoters and directors, as “wilful defaulters”.

3. The Petitioner is a former Joint Managing Director of IL&FS Financial Services Limited (“IFIN”), a wholly-owned subsidiary of Infrastructure Leasing & Financial Services Limited (“ILFS”). The Petitioner has worked with ILFS since June 1993, except for a brief period between February 2003 and August 2005. The Petitioner was eventually designated as a Joint Managing Director of IFIN with effect from 1st April 2014. The Petitioner ceased to be in the services of IFIN with effect from 31st March 2018. The Petitioner’s role as a “whole time director” of IFIN is up for consideration by Respondent No. 1, Union Bank of India (“Union Bank”) in proceedings to declare IFIN, and consequently the Petitioner, as wilful defaulters.

4. IFIN and the Petitioner were served with a common Show Cause Notice dated 5th July 2022 (“SCN”) by 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 sets 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 does 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 is a noticee in the SCN.

Master Circular on Wilful Default:

5. The process of declaring any body corporate as a wilful defaulter and consequently, any person in charge of or responsible to the body corporate as a wilful defaulter, is governed by the RBI’s Master Circular on Wilful Defaulters dated 1st July, 2015 (“Master Circular”). Paragraph 3 of the Master Circular sets out the Mechanism for Identification of a Wilful Defaulter. Paragraph 2.5 sets out the “Penal Measures” that would follow once a person is identified as a wilful defaulter. The term “wilful default” itself is defined in Paragraph 2.1.3 of the Master Circular.

6. In the interest of brevity, each of these paragraphs from the Master Circular is not being reproduced, but the salient features of these paragraphs may be summarised thus:

a) Wilful default by a borrower would be deemed to have occurred (Paragraph 2.1.3 of the Master Circular) if a borrower defaults in paying the bank or financial institution despite having capacity to honour the payment obligations. Such wilful default will also be deemed to have occurred if the borrower does not utilise the monies raised from the lender for the designated purposes, and instead diverts the funds towards other purposes, or if the borrower siphons out the funds borrowed;

b) To declare a person as a wilful defaulter, “the evidence of wilful default”, (Paragraph 3(a) of the Master Circular), on the part of the borrower and its whole-time Director “at the relevant time” should be examined by a Committee headed by an Executive Director of the bank along with two other Senior Officers in the rank of General Manager or Deputy General Manager (“Identification Committee”);

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