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2019 DIGILAW 95 (CAL)

RAGHU HARI DALMIA v. RESERVE BANK OF INDIA

2019-01-18

ARINDAM MUKHERJEE, BISWANATH SOMADDER

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JUDGMENT : ARINDAM MUKHERJEE, J. 1. Gaurav Dalmia and Raghu Hari Dalmia two of the promoters and directors of Pro Minerals Pvt. Ltd.( hereinafter referred to as the said 'company') filed two separate writ petitions being W.P. No. 24911(W) of 2018 and W.P. No. 24912 (W) of 2018 respectively challenging the decision of the Review Committee of Axis Bank Ltd. constituted under Clause 3(c) of the Master Circular on wilful defaulters issued by the Reserve Bank of India on 1st July, 2015 (hereinafter referred to as the said 'Master Circular). The facts of the two cases and the grievances of the two writ petitioners are identical. Both the two writ petitions were dismissed in the same line giving rise to two separate appeals being MAT No. 2 of 2019 (Gaurav Dalmia vs. Reserve Bank of India & Others) and MAT 1 of 2019 (Raghu Hari Dalmia vs. Reserve Bank of India & Others). We, therefore, propose to dispose of both the appeals by a common judgment. 2. The said company availed diverse financial assistance from a consortium of bank headed by Bank of Baroda (in short 'BOB'), the lead bank. Axis Bank is one of the members of the consortium. 3. Records reveal that the said company as part of its project for which it availed the loans had to set up a 20MW Captive Power Plant (in short 'CPP') for which the total project cost was Rs. 109.41 crores and a term loan of Rs. 72.57 crores was sanctioned for the same under the second term loan. The said company on finding that electricity was available from an alternative source, i.e., 33kv transmission line did not set up the CPP and utilized the money received for the same to fund the cost escalation towards mechanical raw material handling system. The diversion of funds is an admitted position and the said company proposed to refund Rs. 38.49 crores after adjusting Rs. 10.68 crores (excluding promoters contribution of Rs. 5.42 crores from Rs. 16.10 crores being the project cost to set up 33 KV transmission line) from Rs. 49.17 crores drawn on account of CPP. It further appears that the accounts of the company were regular till around December, 2015. Thereafter, in spite repeated requests the loan availed by the said company remained unpaid which resulted in the Company's account to be declared Non-Performing Asset (NPA). 49.17 crores drawn on account of CPP. It further appears that the accounts of the company were regular till around December, 2015. Thereafter, in spite repeated requests the loan availed by the said company remained unpaid which resulted in the Company's account to be declared Non-Performing Asset (NPA). Axis Bank, a member of the Consortium of Banks which granted the credit facilities to the said company by a letter dated 5th July, 2016 recalled the credit facilities and requested the said company and the guarantors to repay a sum of Rs. 1,14,59,55,830.39 being the outstanding amount as on 1st July, 2016. Subsequent thereto, the said Axis Bank issued a notice under Section 13(2) of the Securitization And Reconstruction of Financial Assets & Enforcement of Security Interest Act, 2002 (hereinafter the 'SARFAESI Act') demanding a total sum of 1,14 59,55,830.39 being the outstanding dues as on 3rd August, 2016 with interest applied up to 30th June, 2016. The said Axis Bank, thereafter, through its Advocate issued a demand notice on 25th August, 2016. 4. The said Axis Bank on 23rd August, 2016 issued a notice prior to intimation to Reserve Bank of India as "wilful defaulter". All the aforesaid notices were issued to the said company. But in the body of the notice dated 23rd August, 2016 it was clearly mentioned that the direction of the said company will also be declared as wilful defaulters. 5. The said company through its Advocate by a letter dated 2nd September, 2016 replied to the bank's notice dated 23rd August, 2016 wherein the diversion of fund as complained of by the bank was admitted but the admission was sought to be explained by alleging that the diversion took place with the notices and knowledge of the banks. 6. The said company filed a writ petition being W.P. No. 1035 of 2016 (Pro Minerals Pvt. Ltd. & Another vs. Reserve Bank of India & Another) alleging that there has been a violation of principles of natural justice and that the relevant circulars of the Reserve Bank of India were not considered while classifying it as 'wilful defaulter'. In the said writ petition neither Gaurav Dalmia nor Raghu Hari Dalmia were parties. In the said writ petition neither Gaurav Dalmia nor Raghu Hari Dalmia were parties. The said writ petition was disposed of by an order dated 30th November, 2015 by allowing the said company to make a detailed representation to the Deputy Managing Director (in short 'DMD') of Axis Bank. The Identification Committee was also directed to decide the matter impartially by taking into consideration the relevant circulars that were applicable and after giving a reasonable opportunity of hearing to the petitioners, that is to say, to the said company. The representation was directed to be disposed of within a period of four weeks. 7. The said company and its directors filed a written submission dated 14th December, 2016 through one of its directors, namely, Kailash Agarwal to the DMD of Axis Bank. The said written submission was for the purpose of explaining as to why the company and its directors should not be declared as wilful defaulters. Axis Bank gave a reply to the written submission of the said company by a letter dated 29th December, 2016. 8. The committee for identification of wilful defaulters (set up by Axis Bank) by an order dated 9th January, 2017 declared the said company and its directors/promoters as wilful defaulters. The two appellants, namely, Gaurav Dalmia and Raghu Hari Dalmia were also declared as wilful defaulters along with the then directors of the said company. The said company as well as Gaurav Dalmia and Raghu Hari Dalmia were informed of having been declared as wilful defaulters by a letter dated 24th January, 2017. 9. Gaurav Dalmia and Raghu Hari Dalmia by a letter dated 4th February, 2017 caused to be written through their Advocate objected to have been declared as wilful defaulters principally on the following grounds and requested for withdrawal of the letter dated 24th January, 2017:- (i) No statutory notice of show cause was given nor any appropriate opportunity of hearing, submission and personal hearing was availed before declaring them as wilful defaulter, though Reserve Bank of India mandates the same. 10. Pursuant thereto, Gaurav Dalmia and Raghu Hari Dalmia filed two separate writ petitions being W.P. No. 173 of 2017 and W.P. No. 174 of 2017 respectively challenging the decision of the identification committee to declare them as wilful defaulters. 11. 10. Pursuant thereto, Gaurav Dalmia and Raghu Hari Dalmia filed two separate writ petitions being W.P. No. 173 of 2017 and W.P. No. 174 of 2017 respectively challenging the decision of the identification committee to declare them as wilful defaulters. 11. By an order dated 6th April, 2017 both the writ petitions were disposed of by an order setting aside the order of the identification committee declaring Gaurav Dalmia and Raghu Hari Dalmia as wilful defaulters. 12. By two separate letters (both dated 16th April, 2017) one written on behalf of Gaurav Dalmia and the other written on behalf of Raghu Hari Dalmia, the said Gaurav Dalmia and Raghu Hari Dalmia made representations before the wilful defaulter identification committee of Axis Bank stating the reasons as to why they should not be declared as wilful defaulters. The explanations given are found to be identical in both the said letters. The said Gaurav Dalmia and Raghu Hari Dalmia alleged that they were never involved in the day to day operations of the company and were appointed only as non-executive directors. The company from its very inception was managed with professional directors appointed to its Board. 13. Both of them, however, acknowledged the diversion of funds and did not in any place state to be not aware of such diversion of the funds allocated for CPP. They also did not state in their respective submission to have not been consulted at the time of diversion of funds or that the diversion of funds took place despite their dissent. The diversion of funds were made without any prior permission being sought for by the said company. 14. Challenging some observations made in the order dated 6th April, 2017 the said Gaurav Dalmia and Raghu Hari Dalmia filed two appeals being APO No. 270 of 2017 and APO No. 271 of 2017 respectively. The two appeals were disposed of along with APO No. 268 of 2017 filed by the said company also challenging the order dated 6th April, 2017. It will appear from the orders dated 12th June, 2017 passed in the said appeals that at the instance of the appellants, the appellants were allowed to ventilate their grievances before the review committee for considering the matter in its appropriate perspective, if so, approached with a liberty to the appellants to be represented by an Advocate. 15. It will appear from the orders dated 12th June, 2017 passed in the said appeals that at the instance of the appellants, the appellants were allowed to ventilate their grievances before the review committee for considering the matter in its appropriate perspective, if so, approached with a liberty to the appellants to be represented by an Advocate. 15. Gaurav Dalmia and Raghu Hari Dalmia filed separate representations both of which are dated 23rd June, 2017. The contents of the said two representations are mere reiterations of their respective representations before the identification committee made through their Advocate on 16th April, 2017. 16. The review committee considered the representations of Gaurav Dalmia and Raghu Hari Dalmia, gave them a personal hearing being represented by advocate recorded their submissions and declared them as wilful defaulters by assigning reasons. Challenging the order of the review committee the said two writ petitions as aforesaid, were filed, which on being dismissed gave rise to the two appeals with which we are presently concerned. 17. Before us, the appellants contend that the Master Circular is in the nature of a statutory enactment. The provisions contained therein have a mandatory flavour and, as such, the review committee should have considered the case of the appellants strictly in accordance with the provisions contained therein. It was incumbent upon the review committee to consider the case of the appellants keeping in mind that, a solitary and isolated instance be not made the basis of imposing penal action particularly when such actions are very harsh and oppressive in nature. The appellants also contend that, keeping in mind that the penal provisions are not misused and the scope of the discretionary powers are kept to the bare minimum provisions were made in the Master Circular to probe into each case by considering the track record of the person before declaring him as a wilful defaulter. It is also the case of the appellants that considering their track record and the diversion of the fund being a single and isolated incident, the appellants should not have been declared as wilful defaulter. 18. The appellants also contend that the review committee in their decision has travelled beyond the show cause notice which is in the nature of a statutory show cause and, as such, have exceeded their jurisdiction. 18. The appellants also contend that the review committee in their decision has travelled beyond the show cause notice which is in the nature of a statutory show cause and, as such, have exceeded their jurisdiction. The review committee could not have added or expanded the finding of the identification committee by incorporating words which neither found place in the show-cause notice nor in the order of the identification committee. The review committee by doing so has thereby committed grave error. The review committee has also added words which were not there in the order of the identification committee contrary to the legal provisions. 19. The respondent nos. 2 and 3, on the other hand, submit that the review committee was justified in their finding considering the chain of events. According to the said respondents, diversion of funds as mentioned in Clause 2.2.1 (b) is one of the grounds specified in Clause 2.1.3 (b) to declare a creditor as wilful defaulter. This is coupled with default on the part of the company in meeting its payment/repayment/obligations as mentioned in Clause 2.1.3(a). The company has defaulted in making payment of the outstanding sum and, as such, qualified to be declared a wilful defaulter. The said respondents further contend that the review committee as will appear from Clause 3(c) is a higher committee constituted in a two tier adjudicatory mechanism the lower tier being the identification committee is, as such, vested with the power and authority to give independent findings apart from those given by the identification committee to confirm the identification of wilful defaulters. The review committee, as will appear from the order, according to the said respondents, has given personal hearing to the appellants represented by their advocate and after considering all aspect of the matter came to the conclusion that the appellants are wilful defaulters by giving cogent reasons. The decision of the review committee, therefore, cannot be flawed. 20. In reply, the appellants say that the review committee was not discharging the appellate functions and, therefore, could not have expanded the scope of the findings. The identification committee never held that the said company despite having the capacity to honour its obligations failed to meet the payments/repayments/obligations. On the contrary the said company while proposing to refund Rs. 20. In reply, the appellants say that the review committee was not discharging the appellate functions and, therefore, could not have expanded the scope of the findings. The identification committee never held that the said company despite having the capacity to honour its obligations failed to meet the payments/repayments/obligations. On the contrary the said company while proposing to refund Rs. 38.49 crores had specifically made it conditional by saying that refund will take place only after the company is able to generate money. The review committee by using the words "the funds were diverted intentionally and deliberately and in a calculated manner" has added flavours to the original allegation to bring the appellants within the ambit of the definition of wilful defaulter which the review committee could not have done since such words were missing in the show-cause as well as the order of the identification committee. That apart, there has been flagrant violation of mandatory provision of the Master Circular by holding the appellants as wilful defaulters for a single event of default when there is no allegation of failure to repay against the appellants as they neither availed any loan in their independent capacity nor did they give any guarantee to meet the obligations of the said company. The appellants have not even mortgaged their properties to secure the loan. 21. We have considered the Master Circular in details. It will appear from Clause 2.5 (a) wherein the company and their entrepreneurs/promoters have been included, clearly demonstrate that the entrepreneurs and promoters of the company were intended to be brought within the ambit of wilful defaulters for the defaults of the company so that an entrepreneur or a promoter of a company engaged in acts which constitute wilful default are punished for the acts of the company. This is simply because the company does not function of itself but functions through a Board of Directors. The decision of the said company to divert funds was taken by its Board. The diversion of funds took place when the appellants were in the Board of the said company. The act of such diversion binds the appellants being entrepreneur/promoter who has a role in the decision making process of the company. Viewing from another angle, it is the decision of the Board of Directors on the basis whereof the said company indulged in diversion of funds. The act of such diversion binds the appellants being entrepreneur/promoter who has a role in the decision making process of the company. Viewing from another angle, it is the decision of the Board of Directors on the basis whereof the said company indulged in diversion of funds. The Master Circular will be meaningless if a promoter/entrepreneur/director of a company is allowed to escape after being the part of the decision making process of a company which indulged in acts amounting to wilful default including diversion of funds by citing that he or she is only an investor. Unless a promoter/director/entrepreneur is able to establish that he or she did not have any say in the decision making process or had dissented while the company took a decision to divert the funds or perpetuate acts of wilful default cannot escape the rigours of the penal measures indicated in the Master Circular. The appellants in the instant case were directors and, as such, cannot avoid the responsibility as to acts of wilful default committed by the said company. 22. In the instant case, the appellants were the directors of the company at the relevant point of time when the diversion of fund took place. In fact, they were also directors when the company committed default and was declared NPA. Measures under SARFAESI Act were also taken against the company when they were in control and management. The company has failed to establish that it did not have the capacity to honour the obligations. The appellants have also not been able to discharge by adducing documentary evidence or otherwise that they were not even remotely connected with the acts of default and diversion of funds made by the company. On the contrary, it appears from the finding of the review committee after the personal hearing that the appellants admitted to have been involved in the day to day affairs of the said company even after their resignation from the Board of Directors. The resignation of the appellants also amounted to breach of the condition of sanction which prevented the said company from changing its constitution. The track record of the appellant taint toward holding them wilful defaulter. The chain of events definitely goes against the appellants and their contention that a solitary or isolated incident should not form the basis of holding them as wilful defaulters. The track record of the appellant taint toward holding them wilful defaulter. The chain of events definitely goes against the appellants and their contention that a solitary or isolated incident should not form the basis of holding them as wilful defaulters. The Master Circular was essentially framed for monitoring the end use of the funds. If a company and its promoters/directors are allowed to divert funds which will amount to meddling with the end use of the funds, that will leave the Master Circular otiose. Moreover, the banks at the time of giving loan apart from considering the project report also took into consideration the credentials of the appellants being the promoters of the said company. Pre-loan negotiations were made through the appellants. The banks definitely relied upon the credibility of the appellants at the time of sanctioning the loan. The acts of the appellants while in the decision making process of the company has shattered the confidence of the banks which they had at the time of disbursing the loan. We also find that the review committee neither exceeded its jurisdiction nor widened the scope of the enquiry after going through the records. The provisions of the Master Circular were duly adhered to by the review committee. There is also no issue as to violation of natural justice in this case. The appellants were personally heard and their submissions were duly recorded. The diversion is admitted and the default of the said company is an admitted fact. The appellants being in control and management of the said company, therefore, cannot shirk their responsibility as to the default on the part of the said company. 23. In the facts and circumstances, as aforesaid, we find no reasons to interfere with the orders impugned in the two appeals. The said two appeals along with the connected applications are accordingly dismissed. There shall, however, be no order as to costs. Urgent Photostat certified copy of this judgment and order, if applied for, be supplied to the parties on a priority basis.