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2020 DIGILAW 666 (CAL)

Iswari Prasad Tantia v. Bank Of Baroda

2020-12-22

I.P.MUKERJI, MD.NIZAMUDDIN

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JUDGMENT I.P. Mukerji, J. - No organisation or businessman wants to be labelled as a wilful defaulter by a bank or a financial institution. With this label on the head, the organisation or the businessman would have a very poor rating in the business community. Nobody would take any interest to do business with him, or the organisation or giving them any financial credit. No bank or financial institution would grant them loan and those who have already given loan would not think of enhancing it. Instead, it would quickly take steps to realise it. Such a businessman cannot be a promoter or be on the board of directors of a company which has obtained or is seeking loan from a financial institution. The management of the organization may be changed by the concerned authority. Without loan or financial assistance no business can survive. Therefore, being declared as a wilful defaulter of a bank is a very serious matter for a businessman or a business organisation. 2. In this case the appellant No. 1 was the Chairman cum Managing Director of Tantia Construction Ltd. The appellant No. 2 was its whole time director. This company had borrowed money from Vijaya Bank (Now Bank of Baroda) and not repaid it. Another company Castal Extrusion Pvt. Ltd stood guarantor for this loan. 3. In this context it is relevant to state that on 10 th March, 2014 the bank had served on the borrower company and Castal Extrusion Pvt. Ltd (as its corporate guarantor) notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest, (SARFAESI) Act, 2002. 4. The appellants contend that although a demand for payment was made against the borrower company no demand was made against them. 5. The bank took a step ahead. On 16 th March, 2016 it issued a notice to the borrower company and the appellants as to why they should not be declared as wilful defaulters. Castal Extrusion Pvt. Ltd was also served with a similar notice. The ground cited in the notice was as follows: "the unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations......since you No. 2 to 17 (2 being the petitioner NO. Castal Extrusion Pvt. Ltd was also served with a similar notice. The ground cited in the notice was as follows: "the unit has defaulted in meeting its payment/repayment obligations to the lender even when it has the capacity to honour the said obligations......since you No. 2 to 17 (2 being the petitioner NO. 1 and 4 being the petitioner No. 2) are Directors in the above company and you No. 18 (Castral Extrusions Private Ltd) is a corporate guarantor, it is necessary that your name/s should also be published in the list of wilful defaulters accordingly for the reason as stated above." 6. On 4 th January, 2017 the General Manager of the respondent bank addressed a communication to, inter alia, the appellants stating that the company had the "capacity to pay but was not repaying the loan of the bank." It was regularly paying "interest on loan" and "the loan instalments" to the consortium banks. Hence, this default was construed as "wilful" default and the appellants classified as wilful defaulters by the Committee for Identification of wilful defaulters according to the Master Circular dated 1 st July, 2015 of the Reserve Bank of India in their meeting held on 10 th August, 2016 and 17 th August, 2016. Furthermore, this decision was placed before the Review Committee for wilful defaulters headed by the Managing Director and Joint Executive Officer. This committee confirmed the decision dated 10 th August, 2016 and 17 th August, 2016 declaring, inter alia, the appellants as wilful defaulters after a meeting held on 14 th December, 2016. 7. Before proceeding any further with this appeal I think it is necessary to consider some definitions contained in the said Master Circular of the Reserve Bank of India. 2.1.2 Unit : The term 'unit' includes individuals, juristic persons and all other forms of business enterprises, whether incorporated or not. In case of business enterprises (other than companies), banks/Fls may also report (in the Director column of Annex 1) the names of those persons who are in charge and responsible for the management of the affairs of the business enterprise. 2.1.3: (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. 2.1.3: (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. The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorised as wilful must be intentional, deliberate and calculated. Another point is noteworthy and substantial. This appeal is from an order dated 4 th September, 2020 made at the motion stage by a learned single judge of this court refusing to grant an interim order and directing filing of affidavits. In his order the learned judge observed that since the cause of action related to a decision of the bank from "10 th August, 2016 till 13 th March, 2017.... it would be appropriate to permit the respondents to file affidavits". 8. By our order dated 30 th September, 2020 admitting the appeal we directed that the appeal would be heard out. As questions of facts were involved and affidavits were not filed in the trial court, we directed that affidavits in the stay petition be exchanged by the parties and that the papers in the stay application and in the affidavits in opposition and reply would constitute the papers in the appeal. During hearing of the appeal we did not confine ourselves to the short point whether the court was justified in refusing the interim order. We examined the merits of the writ application itself, to cut short litigation time and to do complete justice between the parties. 9. An important development occurred in the beginning in 2020. An application was made by State Bank of India before the National Company Law Tribunal (NCLT) under Section 7 of the Insolvency and Bankruptcy Code, 2016. On 24 th February, 2020, the Tribunal passed an order appointing an Interim Resolution Professional (IRP) and thereafter a Resolution Professional (RP) in respect of the borrower company. A committee of creditors including Vijaya Bank was constituted for the purpose of insolvency resolution of this company. On 24 th February, 2020 NCLT approved the resolution plan made by two organisations, under Section 31(1) of the Code. 10. Mr. Jishnu Saha, learned Senior Advocate appearing for the appellant raised three basic points challenging the said decision of Vijaya Bank. 11. On 24 th February, 2020 NCLT approved the resolution plan made by two organisations, under Section 31(1) of the Code. 10. Mr. Jishnu Saha, learned Senior Advocate appearing for the appellant raised three basic points challenging the said decision of Vijaya Bank. 11. His first point was that before declaring the appellants as wilful defaulters their track record was not gone into as required by Clause 2.1.3 (a) of the Master Circular. 12. Secondly, the adjudication order was not served upon his clients. Hence, they were unable to make an application for review. In any event, the review under the said circular was done by the concerned committee without giving an opportunity to the appellants to represent their case and without any reasons. Thirdly, the resolution of the insolvency under the said scheme or plan, approved by NCLT, necessarily meant that the bank could not make a separate claim against the appellants or declare them as wilful defaulters. In any event he submitted that approval of this plan by NCLT showed that the appellants could not be described as wilful defaulters. 13. Mr. Karmakar for the bank raised two fundamental points. 14. He contended that the writ application was vitiated by delay and ought to have been dismissed. 15. Though it was not dismissed by the learned single judge, he refused to grant any interim order. This exercise of discretion by the learned single judge was properly exercised, he submitted. More importantly, he argued that granting or refusal to grant an interim order was the discretion of the judge. It could not be shown by the appellants that such discretion was exercised improperly. The appellate court should not interfere with this discretion. He cited Wander Ltd. and Anr. Vs. Antox India P. Ltd. reported in 1990 (Supp) SCC 727 Paras 1, 13, 14 and 20 together with Purshottam Vishandas Raheja and Anr. Vs. Shrichand Vishandas Raheja (Dead) through LRS. and Ors. reported in (2011) 6 SCC 73 Paragraphs 29 and 33. 16. Sub-section 4 of Section 30 of the Insolvency and Bankruptcy Code, 2016 conceives of a resolution plan approved by the committee of creditors of the corporate debtor. Under Section 30(6), this plan is put up for approval by the Resolution Professional. Under Section 31 of this code, it is put up for final approval before the adjudicating authority. 16. Sub-section 4 of Section 30 of the Insolvency and Bankruptcy Code, 2016 conceives of a resolution plan approved by the committee of creditors of the corporate debtor. Under Section 30(6), this plan is put up for approval by the Resolution Professional. Under Section 31 of this code, it is put up for final approval before the adjudicating authority. If this authority approved the plan, it would be binding on the corporate debtor, its employees, members and creditors which includes statutory authorities, guarantors etc. The NCLT by its order dated 24 th February, 2020 approved this resolution plan. Thereafter, the writ application was filed. 17. Now, in my opinion, this order approving the resolution plan gave rise to a fresh cause of action to the appellants/writ petitioners to approach this court to seek an order divesting them of their classification as wilful defaulters. Since a fresh cause of action arose in 2020, it could not be said that the writ application was delayed and that there was no case for consideration of an interim order. In the light of this new development, whether the appellants were entitled to an interim order became very material. It gave us grounds to reconsider the case for grant of an interim order and also a final order disposing of the lis, particularly so when all the material papers were before us. 18. Now, I go into the question involved in this appeal, one by one. Who is a wilful defaulter under the said master circular? The word 'wilful' signifies a culpable mental state or the involvement of the concept of mens rea. The default must be intentional. It must be the product of a guilty mind. That is why, Clause 2.1.3(a) of the circular states that a wilful defaulter is the borrower who has capacity to pay but does not pay. The appellants were charge sheeted under this provision of the circular. The said clause also provides that in ascertaining the mental element of the borrower, his track record, obviously with regard to repayment of loan has to be scrutinised by the bank. 19. There is nothing in the communication dated 4 th January, 2017 to suggest that the committee for identification of wilful defaulters in their meeting held on 10 th August, 2016 and 17 th August, 2016 considered the track record of the appellants. 19. There is nothing in the communication dated 4 th January, 2017 to suggest that the committee for identification of wilful defaulters in their meeting held on 10 th August, 2016 and 17 th August, 2016 considered the track record of the appellants. The reason given, namely that "the asset is standard with ten other consortium members which shows that "the company was regularly paying interest/ instalments to the banks but willingly not paying our dues" is not convincing at all. This court expected more detailed reasons which should be based on facts as to why in the opinion of the bank, the appellants were deliberately not paying their dues. There is neither any such discussion in the order of the review committee. 20. The rights of an alleged wilful defaulter are now circumscribed by the judgment of the Supreme Court reported in State Bank of India Vs. Jah Developers Pvt. Ltd. & Ors. reported in (2019) 6 SCC 787 . This judgment lays down some very important dicta. It says that when a proceeding is drawn up to declare a borrower as a wilful defaulter, the borrower's fundamental right to carry on business of his choice under Article 19 (1)(g) of the Constitution of India is likely to be affected. This is so because he would not be granted any additional facilities by a bank or financial institution. He would not get any fresh loan for five years. The management of the borrower's business may also be changed. He could not be a promoter or director of any other borrower company. In those circumstances, the said circular of the Reserve Bank is to be construed reasonably. The "First Committee" must give its order to the borrower as soon as it is made. Within 15 days the borrower can make a representation to the review committee which could be "a full representation on facts and law (if any)." The review committee is to pass a reasoned order on such representation. 21. In my opinion, the right of a borrower on review is very fundamental and extensive. It is not the type of review on the narrow grounds conceived of by Order 47 Rule 1 of the Code of Civil Procedure. When the representation is required to be full on facts and law the consideration is also required to be detailed with reasons on each and every point raised. It is not the type of review on the narrow grounds conceived of by Order 47 Rule 1 of the Code of Civil Procedure. When the representation is required to be full on facts and law the consideration is also required to be detailed with reasons on each and every point raised. We are not going into the question whether a copy of the order of the identification committee was served on the appellants or whether upon service the appellants did not make any representation before the review committee. These are questions of fact, not discussed by the review committee. There is no scope to enter into this controversy at the appellate stage. The records as shown to us are silent on this point. The communication dated 4 th January, 2017 only tell us that the review committee had declined to review the order of the decision of the identification committee. 22. I have also referred to the Insolvency and Bankruptcy Code, 2016 earlier in this judgment. What is most important for the purpose of this case is the effect of the order of NCLT dated 24 th February, 2020 approving the resolution plan. The judgment of the Supreme Court in Committee of Creditors of Essar Steel India Limited vs. Satish Kumar Gupta reported in 2019 SCC Online SC 1478 is most important. The material parts of that judgment are these: "88..........A successful resolution applicant cannot suddenly be faced with "undecided" claims after the resolution plan submitted by him has been accepted as this would amount to a hydra head popping up which would throw into uncertainty amounts payable by a prospective resolution applicant who successfully take over the business of the corporate debtor. All claims must be submitted to and decided by the resolution professional so that a prospective resolution applicant knows exactly what has to be paid in order that it may then take over and run the business of the corporate debtor. This the successful resolution applicant does on a fresh slate, as has been pointed out by us hereinabove. For these reasons, the NCLAT judgment must also be set aside on this count." 23. A Division Bench judgment of this court dated 18 th September, 2020 on the same point is: "FMA 906 of 2020 (MAT 494 of 2020) with IA No. CAN 3 of 2020 (CAN 4730 of 2020) (Axis Bank Limited Vs. For these reasons, the NCLAT judgment must also be set aside on this count." 23. A Division Bench judgment of this court dated 18 th September, 2020 on the same point is: "FMA 906 of 2020 (MAT 494 of 2020) with IA No. CAN 3 of 2020 (CAN 4730 of 2020) (Axis Bank Limited Vs. Gaurav Dalmia & Ors.) with COT 36 of 2020 CAN 1 of 2020 (CAN 5809 of 2020) (Axis Bank Limited Vs. Gaurav Dalmia & Ors.) with FMA 907 of 2020 (MAT 495 of 2020) with IA No. CAN 3 of 2020 (CAN 4734 of 2020) (Axis Bank Limited Vs. Raghu Hari Dalmia & Ors.) with COT 35 of 2020 IA No. CAN 1 of 2020 (CAN 5804 of 2020) (Axis Bank Limited Vs. Raghu Hari Dalmia & Ors.)" 24. It propounded the following ratio:- "........There is also the stigma which attaches to a person or an entity having been found to be a wilful defaulter. Whether or not the name of the wilful defaulter is removed from the list or the default is made good, the fact that a person was once found to be a wilful defaulter would weigh with future lenders approached by such person for credit facilities. It is quite like a one-time smoker being liable to pay more premium for insurance policies despite kicking the habit. It is also akin to a convict wearing a badge of disqualification in certain cases for the rest of his life after having served out the period of punishment. In the present case, since no personal guarantee was furnished by any of the writ petitioners, the moment the money due to Axis Bank was paid in full or was agreed to be received by way of a compromise, the writ petitioners stood rid of their burden as wilful defaulters and their names were liable to be removed from the relevant list. If, however, the writ petitioners continued in their capacity as guarantors in respect of the relevant transactions, the writ petitioners would have continued to be liable till the entire debt was discharged. But as the writ petitioners did not have any personal liability, the moment the resolution was approved and Axis Bank received the payment or is deemed to have received the payment, the names of the petitioners ought to have been taken off the list of wilful defaulters......." 25. But as the writ petitioners did not have any personal liability, the moment the resolution was approved and Axis Bank received the payment or is deemed to have received the payment, the names of the petitioners ought to have been taken off the list of wilful defaulters......." 25. On the basis of this, Mr. Saha argued that upon approval of the resolution plan by NCLT, the debt of the appellants was extinguished. In any event, the appellants could not be called wilful defaulters. 26. This fact was not considered by the learned single judge. We were not told whether this fact was brought to his lordship's notice and not discussed in the judgment or whether it was not raised at all. Leaving aside these technicalities, the existence of this fact at the time the order under appeal was made and not noticed in the said order is a circumstance in which the exception to the principle that the appeal court would not ordinarily interfere with the discretion exercised by the single judge comes into play. The dicta of the Supreme Court in Printers (Mysore) Private Limited vs. Pothan Joseph reported in AIR 1960 SC 1156 followed in Wander Ltd. and Anr. vs. Antox India P. Ltd. reported in 1990 (Supp) SCC 727 and Purshottam Vishandas Raheja and Anr. vs. Shrichand Vishandas Raheja (Dead) through LRS. and Ors. reported in (2011) 6 SCC 73 presupposes that the appeal court sits in judgment over the same set of facts that were before the trial court. In such a case, it would not interfere with the plausible view taken by that court or would not interfere with its discretion unless it was shown that it was exercised arbitrarily, capriciously, perversely or against law. 27. When a relevant fact is not considered while exercising this discretion, the considerations are different and the appeal court has the jurisdiction to set aside or modify the interim order appealed against. 28. Even if we assume that this point was not raised before the court below, we are taking it into account for doing complete justice between the parties. 29. It is true that this order of the NCLT was not in existence at the time the review was made by the said committee. It is in existence now. 28. Even if we assume that this point was not raised before the court below, we are taking it into account for doing complete justice between the parties. 29. It is true that this order of the NCLT was not in existence at the time the review was made by the said committee. It is in existence now. For doing complete justice to the case, it is important that this development is also considered by the review committee. 30. For all those reasons, we grant a fresh opportunity to the appellants to approach the review committee. Provided the appellants file an application for review before the said committee within two weeks of pronouncement of this judgment and order, it shall consider the application in accordance with the principles enumerated and the observations made in this judgment by a reasoned order within eight weeks of filing the review application. I make it clear that all questions of facts, eg. default or wilful default by the borrower or the appellants, whether the appellants were guarantors or not, continuing liability, if any, of the guarantors, the nature and scope of the resolution scheme as approved by the NCLT, whether it extinguished the debt of the borrower company at present or in future, whether the appellants were relieved of their obligation if any, to repay the debt of the borrower, the track record of the borrower and the appellants and all other facts shall be open before and shall be considered by the review committee. 31. The appeal (MAT 600 of 2020 with CAN 1 of 2020 & CAN 2 of 2020) is thus disposed of. 32. The writ application (WPA 6318 of 2020) [Old No. WP 6318(W) of 2020) is also disposed of. This order supersedes the impugned order dated 4 th September, 2020.