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2025 Supreme(Online)(Mad) 61295
IN THE HIGH COURT OF JUDICATURE AT MADRAS
M. DHANDAPANI, J
Rajiv Rai – Appellant
Versus
Bank of Baroda – Respondent
W.P. NO. 14640 OF 2022 | W.M.P. NO. 13842 OF 2022
For the Appellants/Petitioners: Mr.S.R.Raghunathan
For the Respondents: Mr. M.L.Ganesh for R-1, No Appearance for R-2
The court affirmed that the RBI Master Circular on wilful defaulters does permit declarations of past actions as wilful defaults, ensuring compliance with due processes regardless of timelines, thus preserving lender's rights.
Headnote:(A) Article 226 of the Constitution of India - Declaration of wilful defaulters - Order passed by Bank of Baroda has been challenged by erstwhile Directors of SBQ Steels Ltd. on grounds of lack of jurisdiction, violation of natural justice, and retrospective application of RBI Master Circular. The company was declared NPA in 2012; the allegations include fraud, diversion of funds, and lack of authority for proceedings against personal guarantors, with the report not disclosed to respondents. The court ruled that that orders were issued following compliance with due process, underscoring the principle that even past violations may be prosecuted under current guidelines, dismissing the writ petition. (Paras 1-75)
(B) Act of Wilful Default - Invocation of powers for declaring individuals as wilful defaulters can occur when actions fulfill RBI’s guidelines established under Circulars, regardless of when the loan was declared NPA. The court emphasised on the importance of full adherence to investigatory procedures by lenders. (Para 51, 75)
| Table of Content |
|---|
| 1. factual background of the case. (Para 2 , 3 , 4 , 5 , 6) |
| 2. arguments presented by the petitioners. (Para 7 , 8 , 9 , 10 , 11 , 12 , 13 , 14 , 15 , 16 , 17 , 18 , 19) |
| 3. court's observations on procedural compliance. (Para 21 , 22 , 23 , 24 , 25 , 26 , 27 , 28 , 29 , 30 , 31 , 32 , 33 , 34 , 35 , 36 , 37) |
| 4. analysis of the master circular and its implications. (Para 38 , 39 , 40 , 41 , 42 , 43 , 44 , 45 , 46 , 47 , 48 , 49 , 50 , 51 , 52 , 53 , 54 , 55 , 56) |
| 5. arguments regarding violation of natural justice. (Para 57 , 58 , 59 , 60 , 61 , 62 , 63 , 64 , 65 , 66 , 67 , 68 , 69 , 70 , 71 , 72 , 73) |
| 6. final legal findings. (Para 74) |
| 7. conclusion and order of the court. (Para 75) |
ORDER
Aggrieved by the impugned order in and by which the petitioners have been declared as wilful defaulters, the present writ petition has been filed by the petitioners seeking quashment of the said order.
2. It is the averment of the petitioners that they are the erstwhile Directors of SBQ Steels Ltd., which was into production of High Grades of Steel and Generating Power. The 1st respondent had extended a term loan facility to SBQ Steels along with a consortium of nine lenders. In the year 2011, due to severe financial crisis and other extraneous factors, SBQ Steels was brought under Corporate Debt Restructuring as early as 2011 and despite diligent efforts to revive the company by the Directors/Promoters, the restructuring failed and the company was declared as Non-Performing Asset (for short ‘NPA’) in the year 2012 and between 2012 and 2014, the activities of the company was on the basis of the approval of the concurrent auditors appointed by the lead banker.
3. It is the further averment of the petitioners that proceedings were thereafter initiated under the Insolvency and Bankruptcy Code (for short ‘IBC’) before the National Company Law Tribunal (for short ‘NCLT’) and a Corporate Insolvency Resolution Process (for short ‘CIRP’)was initiated and a Resolution Professional was appointed to manage the affairs of the company in the year 2017. However, as no viable resolution plan could be formulated, the company was ordered to be liquidated in the year 2019 and the assets of the company were sold as a going concern and proceeds were disbursed to the creditors including the 1st respondent.
4. It is the further averment of the petitioners that the 1st respondent was a term loan lender and also participated in the resolution process. However, in the year 2021, after the expiry of about 9 years from the date on which the company was declared as a NPA and 4 years after the initiation of CIRP, show cause notice dated 26.7.2021 and 11.8.2021 were issued to the petitioners by the 1st respondent calling upon them to show cause as to why the petitioners should not be declared as wilful defaulters. It is the further averment of the petitioners that the show cause notice was on the basis of a forensic audit initiated by the 1st respondent without following any of the procedures contemplated by the Reserve Bank of India and further the copy of the audit report was also not provided to the petitioners. It is the further averment of the petitioners that the said show cause notice dated 11.8.2021 was challenged before this Court in W.P. No.26560 of 2021. It is the further averment of the petitioners that though all the other banks in the consortium had proposed to declare the company as a wilful defaulter in the year 2014-2015, however, upon being satisfied with the explanation and other materials submitted by the petitioners, the Grievance Redressal Committee had dropped the proceedings.
5. It is the further averment of the petitioners that on 23.8.2021 on receipt of the show cause notice, a detailed explanation was submitted along with the material records setting out the situation under which the company became a NPA and sought for withdrawal of the notice. Consequent to the said reply, the petitioners were called for a personal hearing on 23.11.2021
