Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2019 Supreme(SC) 596

SUPREME COURT OF INDIA
R.F. NARIMAN, VINEET SARAN, JJ.
STATE BANK OF INDIA – APPELLANT
VERSUS
M/S. JAH DEVELOPERS PVT. LTD. & ORS. – RESPONDENTS
CIVIL APPEAL NO.4776 OF 2019 (Arising out of Special Leave Petition (Civil) No.8591 of 2016) WITH CIVIL APPEAL NO.4777 OF 2019 (Arising out of Special Leave Petition (Civil) No.10008 of 2017) WITH CIVIL APPEAL NO.4778 OF 2019 (Arising out of Special Leave Petition (Civil) No.26329 of 2017)
Decided On : 08-05-2019

Advocates Appeared:
For Petitioner(s): Mr. Sanjay Kapur, AOR Mr. Bharath Gangadharan, Adv. Ms. Megha Karnwal, Adv. Ms. Shubhra Kapur, Adv. Mr. Vipin Kumar Jai, AOR
For Respondent(s): Mr. Saurabh Mishra, AOR Mr. Shibashish Misra, AOR Mrs. Kanchan Kaur Dhodi, AOR

IMPORTANT POINT
There is no right to be represented by a Lawyer in in-house proceedings contained in paragraph 3 of RBI Revised Circular dated 01.07.2015.

Headnote:(A) Advocates Act, 1961 – Section 30 – Constitution of India – Article 19(1)(g) – RBI Revised Circular dated 01.07.2015 – Right to practice – Right of wilful defaulter under Circulars of Reserve Bank of India, to be represented by a Lawyer – In-house committees are not vested with any judicial power at all, their powers being administrative powers given to in-house committees to gather facts and then arrive at a result – No Lawyer would have any right under Section 30 of Advocates Act to appear before the same – There is no right to be represented by a Lawyer in in-house proceedings contained in paragraph 3 of Revised Circular dated 01.07.2015 – Events of wilful default as mentioned in Paragraph 2.1.3 would only relate to individual facts of each case – Whether default is intentional, deliberate and calculated is a question of fact which the lender may put to borrower in a show cause notice to elicit borrower’s submissions on the same – However, Article 19(1)(g) is attracted in facts of present case as the moment a person is declared to be a wilful defaulter, impact on its fundamental right to carry on business is direct and immediate – No additional facilities can be granted by any bank/financial institutions and entrepreneurs/promoters would be barred from institutional finance for five years – Banks/financial institutions can even change management of wilful defaulter and a promoter/director of a wilful defaulter cannot be made promoter or director of any other borrower company – Under Section 29A of Insolvency and Bankruptcy Code, 2016, a wilful defaulter cannot even apply to be a resolution applicant – Given these drastic consequences, Revised Circular, being in public interest, must be construed reasonably. (Paras 12 and 21)
       (B) Insolvency and Bankruptcy Code, 2016 – Section 29A – Recovery of debt – RBI Revised Circular dated 01.07.2015 – Proceedings before in-house committee – Committee comprising of Executive Director and two other senior officials, being First Committee, after following paragraph 3(b) of Revised Circular dated 01.07.2015, must give its order to borrower as soon as it is made – Borrower can then represent against such order within a period of 15 days to Review Committee – Such written representation can be a full representation on facts and law – Review Committee must then pass a reasoned order on such representation which must then be served on borrower – Given the fact that earlier Master Circular dated 01.07.2013 itself considered such steps to be reasonable, Court incorporate all these steps into Revised Circular dated 01.07.2015 – Impugned judgment set aside. (Para 21)
       Facts of Case:
       Question that arises in present appeals is whether, when a person is declared to be a wilful defaulter under Circulars of Reserve Bank of India, such person is entitled to be represented by a lawyer of its choice before such declaration is made.
       Findings of Court:
       First and foremost, Committee comprising of Executive Director and two other senior officials, being First Committee, after following paragraph 3(b) of Revised Circular dated 01.07.2015, must give its order to borrower as soon as it is made. Borrower can then represent against such order within a period of 15 days to Review Committee. Such written representation can be a full representation on facts and law (if any). Review Committee must then pass a reasoned order on such representation which must then be served on borrower.
       Result : Appeals allowed.

JUDGMENT :

R.F. NARIMAN, J.

1. Leave granted.

2. The question that arises in the present appeals is whether, when a person is declared to be a wilful defaulter under the Circulars of the Reserve Bank of India [“RBI”], such person is entitled to be represented by a lawyer of its choice before such declaration is made.

3. The RBI Circular dated 01.07.2013 is described as a “Master Circular on Wilful Defaulters” [“Master Circular”] and is addressed to all scheduled commercial banks (excluding Regional Rural Banks (RRBs) and Local Area Banks (LABs)), and to All India Notified Financial Institutions. The purpose of the said Master Circular is stated as follows:

“Purpose:
To put in place a system to disseminate credit information pertaining to wilful defaulters for cautioning banks and financial institutions so as to ensure that further bank finance is not made available to them.”
Under this Master Circular, “wilful default” has been defined as follows:
“2.1. Definition of wilful default
The term “wilful default” has been redefined in supersession of the earlier definition as under:
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.”

The Grievance Redressal Mechanism is set out in paragraph 3 of the Master Circular as follows:

“3. Grievance Redressal Mechanism
Banks/FIs should take the following measures in identifying and reporting instances of wilful default:
(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-à-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.”

4. On 01.07.2015, the RBI issued another Master Circular consolidating instructions on how all scheduled commercial banks and notified financial institutions are to deal with wilful defaulters [“Revised Circular”]. The definition of “wilful default” is substantially the same as in the earlier Master Circular. However, the mech

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2019 Supreme(SC) 596

IMPORTANT POINTThere is no right to be represented by a Lawyer in in-house proceedings contained in paragraph 3 of RBI Revised Circular dated 01.07.2015.

Cases Referred (9)

IMPORTANT POINT
There is no right to be represented by a Lawyer in in-house proceedings contained in paragraph 3 of RBI Revised Circular dated 01.07.2015.