IMPORTANT POINT
A declaration of willful default cannot be based solely on a non-conclusive audit report without independent verification.

JUDGMENT :

SABYASACHI BHATTACHARYYA, J.

1. The two writ petitions, being on connected issues, are taken up together for hearing.

2. In WPO No. 633 of 2023, the petitioners have challenged the decision of the Willful Defaulter Identification Committee (hereinafter referred to as “the First Committee”) to declare the petitioners as Willful Defaulters under the Master Circular on Wilful Defaulters issued by the Reserve Bank of India (RBI) on July 1, 2015.

3. In WPO No. 212 of 2024, the petitioners have challenged the decision of the Review Committee (RC) to affirm the said declaration of the First Committee. At the juncture when the second writ petition was filed, a cryptic communication of the decision of the RC was made to the petitioners, based on which the writ petition was filed. Subsequently, having been served with a copy of the detailed minutes of the RC, the same has been annexed to a supplementary affidavit filed in connection with the second writ petition and also brought within the fold of the challenge.

4. Thus, the subject-matter of consideration in the present writ petitions is whether the respondent-Bank, that is, the Central Bank of India was justified in declaring the petitioners to be willful defaulters through its First Committee and in affirming the same in the decision of the RC.

5. Upon hearing learned counsel for the parties, each of the components of challenge is being dealt with separately herein-below.

6. The first ground taken by the petitioners is that the sole basis of the First Committee decision was a Transaction Audit Report (TAR) authored by M/s. Deloitte Touche Tohmatsu India, LLP, an Auditor which purportedly carried out a forensic audit of the borrower-Company. A bare perusal of the First Committee decision substantiates the fact that the entire decision is based on allegations levelled in the said TAR. No independent evidence apart from the TAR has been relied on by the First Committee in coming to its conclusions.

7. It is rather surprising that the First Committee relied on the said report. The Auditor Firm which authored the report itself indicated in several places of the report that the same was not conclusive. Instances are:

In the second paragraph of the report, the Auditor stated that the report has been prepared solely for the internal use and benefit of the Resolution Professional (RP) for the specific purpose described in the Contract. In paragraph 4 of the report, the Auditor clarifies that it did not independently verify the accuracy/reliability/genuineness of the information and makes no warranties or representations with respect to any part of the report. Any user who gets any access to or use of the Report, the Auditor went on to specify, understands and accepts that it has no rights with respect to the Report except the limited right to view and use the Report for information purposes alone and at his sole and entire risk. It was reiterated in paragraph 6 that the Auditor has not made and does not make any warranties or representations to any user and does not owe any duty of care or responsibility towards any user in respect of the Report.

8. Again, in paragraph 8, it is stipulated that the scope of the services of the Auditor did not constitute an audit conducted in accordance with generally accepted accounting principles, or an examination of internal controls/procedures or other attestation or review or services to perform or agreed upon procedures in accordance with the standards established by the Institute of Chartered Accountants of India.

9. In paragraph 10 of the report, the Auditor (rather proudly) declares that it has assumed that the verbal explanations provided by the representatives of the Corporate Debtor were accurate and honest representations but did not independently verify the accuracy/ reliability/genuineness of the information or from other independent sources unless specified otherwise specifically in the Report. Hence, the content of the Report should not form t