IMPORTANT POINT
The judgment establishes the importance of the NPA classification, the liability of guarantors, and the applicability of the IBC moratorium to wilful defaulter proceedings.

JUDGMENT :

Sabyasachi Bhattacharyya, J.

1. The petitioner no. 1 is a borrower-Company and the other petitioners are its Directors/guarantors. In the present writ petition, the petitioners have challenged a Show-cause Notice dated March 1, 2024 issued by the respondent-Authorities for declaring the petitioners as wilful defaulters in terms of the Master Circular on Wilful Defaulters issued by the Reserve Bank of India (RBI) on July 1, 2015.

2. Learned senior counsel for the petitioners submits that the respondent, after having failed in numerous attempts to vex the petitioners on the self-same alleged default, have issued the impugned Show-cause Notice.

3. The premise of the Show-cause Notice is a purported classification of the account of the petitioner no. 1 as a Non Performing Asset (NPA) with effect from December 27, 2020. However, in a writ petition preferred against such classification, bearing WPO No. 1440 of 2023, this Court restrained the respondent by an order of injunction from proceeding on the premise of, or giving effect to, the impugned proposal for sale of NPAs on the premise that the classification of the petitioner no.1’s account as NPA was patently de hors the relevant RBI Circulars issued during the Covid-19 pandemic.

4. Hence, the said classification could not be a basis of the issuance of the show cause.

5. After such classification of NPA, the respondent-bank took out an application under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016 which was rejected.

6. The respondent-bank also initiated a proceeding for recovery of dues against the petitioners which is pending before the Debts Recovery Tribunal.

7. The respondent has, further, issued a Notice under Section 13(2) of the SARFAESI Act but as yet not taken measures under Section 13(4) of the said Act, thereby precluding the petitioners from challenging such measures before the Tribunal.

8. Over and above, a proceeding under Section 95 of the IBC has been initiated. It is argued that, thus, Section 96 of the IBC comes into play, imposing a moratorium on any legal action or proceeding in respect of the debt. Accordingly, it is argued, the present Show-cause Notice, which is nothing but a proceeding in respect of the debt, is violative of Section 96, IBC.

9. Learned senior counsel next argues that in the first ground of the Show-cause Notice, the assets of the Directors/guarantors have been mentioned. However, the assets of the Directors are not the assets of the borrower-Company, which is the unit alleged to have committed the default.

10. That apart, it is contended that no copy of the Forensic Audit Report (FAR) or other documents relied on by the respondent in the Show-cause Notice were served on the petitioners.

11. Learned senior counsel next places the allegations made in the Show-cause Notice in a bid to contend that none of those meet the tests of “wilful default” as defined in the Master Circular. Hence, it is argued that the Show-cause Notice ought to be set aside.

12. Learned counsel for the respondent-Bank argues that writ petitions are normally not entertained at the Show-cause stage. There has been no determination as yet on the merits of the allegations. Hence, no legal rights of the petitioners have been infringed for the petitioners to seek redress under Article 226 of the Constitution of India.

13. With regard to the NPA classification, it is argued that the petitioners themselves, in at least two communications (copies of which have been submitted in court during hearing) dated January 27, 2022 and September 19, 2022, have admitted the date of NPA to be December 27, 2020. Thus, the petitioners are precluded from disputing the said date of classification of NPA.

14. It is next argued that the default precedes the NPA classification. Only upon the account being overdue for over 90 days, it is classified as NPA. Thus, the NPA classification has nothing to do with the commission of default by the borrower. As Directors/guarantors, the petition