Delhi High Court
Punjab National Bank vs Nita Puri on 8 August, 2025
Author: C. Hari Shankar
Bench: C. Hari Shankar
$~
* IN THE HIGH COURT OF DELHI AT NEW DELHI
Reserved on: 3 July 2025
Pronounced on: 8 August 2025
+ LPA 294/2024
PUNJAB NATIONAL BANK .....Appellant
Through: Mr. Sanjay Bajaj, Mr. Shivam
Takkar and Mr. Sarthak Sehgal, Advs.
versus
NITA PURI .....Respondent
Through: Mr. Rajeev Goyal, Mr. Vaibhav
Mishra, Mr. Anshul Mishra, Mr. Ekansh
Mishra and Mr. Manu Krishnan, Ms. Devika
Mohan, Mr. Vikram Choudhary, Advs.
+ LPA 357/2024
PUNJAB NATIONAL BANK .....Appellant
Through: Mr. Sanjay Bajaj, Mr. Shivam
Takkar and Mr. Sarthak Sehgal, Advs.
versus
RATUL PURI .....Respondent
Through: Mr. Rajeev Goyal, Mr. Vaibhav
Mishra, Mr. Anshul Mishra, Mr. Ekansh
Mishra and Mr. Manu Krishnan, Ms. Devika
Mohan, Mr. Vikram Choudhary, Advs.
+ LPA 396/2024 & CM APPL. 30156/2024
BANK OF BARODA .....Appellant
Through: Mr. Kush Sharma, Mr.
Nishchaya Nigam and Ms. Vagmi Singh,
Advs.
versus
LPA 294/2024 and other connected matters
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RATUL PURI .....Respondent
Through: Mr. Rajeev Goyal, Mr. Vaibhav
Mishra, Mr. Anshul Mishra, Mr. Ekansh
Mishra and Mr. Manu Krishnan, Ms. Devika
Mohan, Mr. Vikram Choudhary, Advs.
+ LPA 398/2024 & CM APPL. 30171/2024
BANK OF BARODA .....Appellant
Through: Mr. Kush Sharma, Mr.
Nishchaya Nigam and Ms. Vagmi Singh,
Advs.
versus
RATUL PURI .....Respondent
Through: Mr. Rajeev Goyal, Mr. Vaibhav
Mishra, Mr. Anshul Mishra, Mr. Ekansh
Mishra and Mr. Manu Krishnan, Ms. Devika
Mohan, Mr. Vikram Choudhary, Advs.
CORAM:
HON'BLE MR. JUSTICE C. HARI SHANKAR
HON'BLE MR. JUSTICE AJAY DIGPAUL
% JUDGMENT
08.08.2025
C. HARI SHANKAR, J.
1. These appeals assail substantially similar judgments passed by a
learned Single Judge of this Court in writ petitions which raised
substantially similar challenges. They are, therefore, being disposed of
by this common judgment. However, for the sake of convenience, we
propose to treat LPA 396/2024 as the lead case and to extrapolate our
decision in that appeal to the other appeals before us.
LPA 294/2024 and other connected matters
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LPA 396/2024 [Bank of Baroda v Ratul Puri]
The lis
2. The Bank of Baroda1 assails judgment dated 29 February 2024
passed by a learned Single Judge of this Court in WP (C) 4181/20232.
3. By the impugned judgment, the order dated 23 March 2023
passed by the Review Committee of the BOB, declaring the
respondent to be a “wilful defaulter” within the meaning of Clause
2.1.3 of the Master Circular on Wilful Defaulters, 20153, issued by the
Reserve Bank of India4, has been set aside.
Background
4. Moser Baer India Ltd5 availed loans from various banks. These
included a loan from BOB, which was sanctioned vide letters dated 12
December 2006 and 24 April 2010. At the time of availing of the loan,
the respondent Ratul Puri was a whole-time director of MBIL. In
2010, he decided to exit from MBIL, though he continued to remain a
director on its board.
5. Following the decline in the fortunes of MBIL, BOB and other
1 “BOB” hereinafter
2 Ratul Puri v Bank of Baroda
3 “Master Circular” hereinafter
4 “RBI” hereinafter
5 “MBIL” hereinafter
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lenders, which lent monies to MBIL, found MBIL to be a fit case to
consider debt restructuring. A Joint Lenders Meet6, of all lenders of
MBIL, therefore, was convened on 3 February 2012. Among the
lenders who participated in the JLM was BOB. MBIL placed a
restructuring plan before the JLM. The JLM, after considering the
plan, decided to admit MBIL for Corporate Debt Restructuring7, in
accordance with the CDR Master Circular issued by the RBI.
6. To ascertain sustainability of the CDR, MBIL was required to
submit a Flash Report, which would set out the reasons for its decline,
its viability and its plan for revival. The Flash Report was intended to
be forwarded by the lenders of MBIL to an independent agency for
obtaining a Techno Economic Viability Report8, which would indicate
whether the restructuring plan proposed by MBIL was financially
viable.
7. In terms of the aforesaid directions, MBIL submitted a Flash
Report with the CDR cell of the lender banks on 18 February 2012.
Among the reasons cited in the Flash Report to which the financial
decline of MBIL was attributable, was the inability of MBIL to realise
investments made in its two subsidiaries, Moser Baer Photo Voltaic
Ltd9 and Moser Baer Solar Ltd10. MBPV was later renamed Helios
Photo Voltaic Ltd11.
6 “JLM” hereinafter
7 “CDR” hereinafter
8 “TEV Report” hereinafter
9 “MBPV” hereinafter
10 “MBSL” hereinafter
11 “HPVL” hereinafter
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8. After perusing the flash report submitted by MBIL, the CDR
Empowered Group12 decided, on 24 February 2012, to admit the
proposal of MBIL for restructuring. In the decision, MBIL was placed
in the Class-B category under the CDR Scheme, which covered
“Corporates/promoters affected by external factors and also having
weak resources, inadequate vision and not having support of
professional management”.
9. The monitoring bank of the lenders was the Central Bank of
India13. On 4 April 2012, MBIL informed the Central Bank that the
respondent was no longer associated with the day-to-day functioning
of the MBIL. It was pointed out that he had exited MBIL and it was
requested that the CDR proposal submitted by MBIL be considered
taking into account this fact.
10. On 30 April 2012, the respondent resigned as Executive
Director of MBIL and submitted Form-32 with the Registrar of
Companies14 to that effect. He also, therefore, ceased to be a
shareholder of MBIL and transferred his shareholding in MBIL to his
father.
11. The lender banks forwarded the flash report submitted by MBIL
to an external agency Ernst and Young15 for examination. E & Y
submitted its detailed TEV Report on 9 June 2012, which opined that
MBIL was considered to be viable.
12 “CDR-EG” hereinafter
13 “Central Bank” hereinafter
14 “ROC” hereinafter
15 “E & Y” hereinafter
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12. On 20 July 2012, another JLM was convened of all the lender
banks, including BOB. The JLM considered the Flash Report
submitted by MBIL, the TEV report of E & Y and a stock audit report
of RRCA & Associates, and issued a Final Restructuring Scheme16
dated 20 July 2012.
13. In accordance with the FRS, MBIL and the Consortium of
Banks, including BOB and the Central Bank as the monitoring
institution, signed a Master Restructuring Agreement17 dated 27
December 2012 for implementation of the CDR package agreed
between the parties. Clause 6.1 (iv) of the MRA required MBIL to
execute a Trust and Retention Account18. Consequent to execution of
the TRA agreement, MBIL was required to transact, for its day-to-day
functioning, only through the TRA account.
14. On 16 November 2012, the respondent resigned as Director of
MBIL and filed Form-32 to that effect, with the ROC. This constituted
complete exit, by the respondent, from MBIL.
15. In terms of clause 6.1(iv) of the MRA, the TRA Agreement was
executed between the lender banks and the MBIL on 12 February
2013.
16. Despite all these efforts, MBIL was unable to repay the loan
16 “FRS” hereinafter
17 “MRA” hereinafter
18 “TRA” hereinafter
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amounts and committed defaults. On account of these defaults, the
lender banks decided to exit from the approved CDR Scheme on 10
October 2016.
17. In 2017, Alchemist Asset Reconstruction Company Ltd., one of
the financial creditors of MBIL, filed an application before the
National Company Law Tribunal19 under Section 7(1)20 of the
Insolvency and Bankruptcy Code 201621 for triggering the Corporate
Insolvency Resolution Process22 of MBIL. Vide its order dated 14
November 2017, the NCLT appointed one Mr. Anil Kohli as the
Interim Resolution Professional23 of MBIL. The IRP directed M/s.
GSA Associates, Chartered Accountants to conduct a forensic audit of
MBIL. GSA Associates submitted its Forensic Audit Report24 on 3
June 2019.
19 “NCLT”, hereinafter
20 7. Initiation of corporate insolvency resolution process by financial creditor. –
(1) A financial creditor either by itself or jointly with other financial creditors, or any other
person on behalf of the financial creditor, as may be notified by the Central Government, may file
an application for initiating corporate insolvency resolution process against a corporate debtor
before the Adjudicating Authority when a default has occurred:
Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section
(6-A) of Section 21, an application for initiating corporate insolvency resolution process against the
corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same
class or not less than ten per cent. of the total number of such creditors in the same class, whichever
is less:
Provided further that for financial creditors who are allottees under a real estate project,
an application for initiating corporate insolvency resolution process against the corporate debtor
shall be filed jointly by not less than one hundred of such allottees under the same real estate project
or not less than ten per cent. of the total number of such allottees under the same real estate project,
whichever is less:
Provided also that where an application for initiating the corporate insolvency resolution
process against a corporate debtor has been filed by a financial creditor referred to in the first and
second provisos and has not been admitted by the Adjudicating Authority before the
commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application
shall be modified to comply with the requirements of the first or second proviso within thirty days
of the commencement of the said Act, failing which the application shall be deemed to be
withdrawn before its admission.
Explanation.–For the purposes of this sub-section, a default includes a default in respect
of a financial debt owed not only to the applicant financial creditor but to any other financial
creditor of the corporate debtor.
21 “IBC”, hereinafter
22 “CIRP”, hereinafter
23 “IRP”, hereinafter
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18. On 13 March 2020, BOB issued a show cause notice to the
respondent to show cause as to why he be not declared a wilful
defaulter under the Master Circular. The show cause notice contained
six allegations against the respondent. Allegations 2 to 6 were
subsequently dropped, and the present dispute, therefore, essentially
concerns Allegation 1, which read:
“MBIL has made substantial investment in subsidiaries and related
entities amounting to Rs.1586.75 Cr as on 31.12.13. During the
period from 01.04.13 to 31.03.15 provision and write off made
amounting to Rs.287.03 Cr.”
19. The respondent responded to the aforesaid show cause notice on
30 March 2020 and 12 August 2020. The respondent sought to be
supplied the documents on the basis of which it was proposed to
declare him a wilful defaulter. In response thereto, BOB on 11 January
2021 forwarded a copy of the FAR to the respondent. Vide
communication dated 2 June 2021, the respondent submitted that the
FAR did not disclose any event of wilful default on his part.
20. This was followed by an opportunity of personal hearing which
the respondent availed on 5 August 2021 following which he
submitted written submissions on 4 September 2021. In the said
written submissions, apart from pointing out that he had nothing to do
with the affairs of the MBIL during the period in question, it was
further submitted that investments of MBIL in its subsidiaries were
made from its internal accruals, and not from borrowed funds and that
therefore, these investments could not be used as a justification to
24 “FAR”, hereinafter
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declare the respondent to be a wilful defaulter. It was further pointed
out that the details of these investments had been disclosed in the
audited financial statements of MBIL, which had been submitted to all
lenders including BOB.
21. The Identification Committee of the BOB proceeded to pass
order dated 19 August 2022 declaring the respondent to be a wilful
defaulter in terms of the Master Circular. Of the six allegations against
the respondent in the show cause notice dated 13 March 2020,
Allegations 2 to 6 were dropped. Allegation 1 was, however,
confirmed and, consequently, the respondent was declared as a wilful
defaulter in terms of the Master Circular. In arriving at this
conclusion, the Identification Committee observed that during the
period when the funds had been invested by MBIL in its subsidiaries,
which constituted diversion and siphoning of funds in terms of the
Master Circular, the respondent was a whole time Director in MBIL
and in complete control of its affairs. It was further opined by the
Identification Committee that the investments made by the MBIL in
its subsidiaries, which triggered a shortage of funds, amounted to
diversion of funds in terms of Clause 2.1.3 (b) and (c) of the Master
Circular. Following these findings, the Identification Committee held
the respondent to be a wilful defaulter.
22. The respondent filed a Review Petition challenging the findings
of the Identification Committee, on 22 September 2022.
23. The Review Committee by order dated 23 March 2023
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confirmed the findings of the Identification Committee.
24. Aggrieved thereby, the respondent approached this Court by
means of WP (C) 4181/2023. The prayer clause in the writ petition
read thus:
“Hence, in view of the circumstances mentioned herein above, the
Petitioner herein most respectfully pray that this Hon’ble Court
may graciously be pleased to:
a. Issue a writ/ order/ direction of mandamus and/or
certiorari quashing/setting aside the Order passed by the
Review Committee of the Respondent Bank in its meeting
held on 23.03.2023 (impugned order), by which order it has
arbitrarily, unfairly and unreasonably declared the name of
the Petitioner as a Willful Defaulter.
b. Issue a writ/ order/ direction prohibiting the
Respondent and or/its servants, agents, assigns and officers
and/or anyone claiming through or under them from giving
any effect and/or further effect and/or taking any steps
and/or acting in furtherance of the Review Committee
Order dated 23.03.2023, in any manner whatsoever.
Pass such other orders as may be deemed fair and equitable
in the facts of the case and in the interests of justice.”
25. By the impugned judgment, the learned Single Judge has
allowed WP(C) 4181/2023. The present appeal, at the instance of the
BOB, challenges the said decision.
The Impugned Judgment
26. The findings of the learned Single Judge may be enumerated
thus:
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(i) The Master Circular was issued by the RBI in exercise of
the powers conferred by Sections 21 and 35 A of the Banking
Regulation Act, 1949. Clause 2.1.3 thereof read thus:
“2.1.3 Wilful Default: A ‘wilful default’ would be deemed
to have occurred if any of the following events is noted:
*****
(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.
*****
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.”
(ii) Thus, “wilful default” could be said to have taken place
only if the loan amounts lent by the bank, which constituted the
“borrowed funds”, were diverted or siphoned off by the
borrower, for purposes other than those for which the loan was
granted.
(iii) Clause 2.2 of the Master Circular defined diversion and
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siphoning off funds thus:
“2.2 Diversion and siphoning of funds: The terms
“diversion of funds” and “siphoning of funds” should
construe to mean the following: –
2.2.1 Diversion of funds, referred to at para 2.1(b) above,
would be construed to include any one of the undernoted
occurrences:
(a) utilisation of short-term working capital
funds for long-term purposes not in conformity with
the terms of sanction;
(b) deploying borrowed funds for purposes /
activities or creation of assets other than those for
which the loan was sanctioned;
(c) transferring borrowed funds to the
subsidiaries / Group companies or other corporates
by whatever modalities;
(d) routing of funds through any bank other than
the lender bank or members of consortium without
prior permission of the lender;
(e) investment in other companies by way of
acquiring equities / debt instruments without
approval of lenders;
(f) shortfall in deployment of funds vis-à-vis the
amounts disbursed / drawn and the difference not
being accounted for.
2.2.2 Siphoning of funds, referred to at para 2.1(c) above,
should be construed to occur if any funds borrowed from
banks / FIs are utilised for purposes un-related to the
operations of the borrower, to the detriment of the financial
health of the entity or of the lender. The decision as to
whether a particular instance amounts to siphoning of funds
would have to be a judgement of the lenders based on
objective facts and circumstances of the case.”
Again, it was clear from Clause 2.2 that funds could be said to
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have been diverted or siphoned off only if they were borrowed
funds. It was only when borrowed funds were deployed or used
for a purpose other than the purpose for which the loan was
sanctioned, that they could be said to have been diverted or
siphoned off. Further, the decision regarding diversion or
siphoning off funds had to be made by the Bank based on the
objective facts and circumstances of the case.
(iv) Clause 3 of the Master Circular provided the mechanism
for identification of a borrower as a wilful defaulter. The
evidence in that regard was first to be examined by the
Identification Committee headed by an Executive Director or
equivalent and consisting of two other senior officers of the
bank of the rank of GM /DGM. If the Identification Committee
concluded that an event of wilful default had occurred, it would
issue a show cause notice to the borrower. After considering the
response of the borrower, a final order on the aspect of whether
the borrower could be treated as a wilful defaulter would be
issued by the Identification Committee, prior to which the
borrower would be afforded an opportunity of personal hearing.
The decision of the Identification Committee would be
reviewed by a Review Committee headed by the Chairman/
MD/CEO and also comprising two other independent non-
executive Directors of the bank. A declaration of a borrower as
a wilful defaulter would be final only after confirmation by the
Review Committee.
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(v) Clause 3 further provided that in terms of Section 2(60)25
of the Companies Act, 2013, an officer could be treated as a
wilful defaulter only if he was a whole time Director or fell
within one of the categories of exceptions enumerated in the
said clause.
(vi) The consequences of declaration of a person as a wilful
defaulter were drastic. A wilful defaulter was barred from
availing any loan facility in the future or floating any new
venture. He was also exposed to criminal proceedings. A label
of wilful defaulter also affected the reputation of the person
concerned, with whom business entities would hesitate to
conduct any business. Financial institutions would also be
chary of providing loans to wilful defaulters. Characterization
as a wilful defaulter, therefore, was in the nature of a financial
death knell of the individual or entity concerned. The drastic
nature of declaration of a person as a wilful defaulter had also
been noted by the Supreme Court in its judgment in SBI v Jah
25 (60) “officer who is in default”, for the purpose of any provision in this Act which enacts that an
officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment,
fine or otherwise, means any of the following officers of a company, namely:
(i) whole-time director;
(ii) key managerial personnel;
(iii) where there is no key managerial personnel, such director or directors as specified by the
Board in this behalf and who has or have given his or their consent in writing to the Board to such
specification, or all the directors, if no director is so specified;
(iv) any person who, under the immediate authority of the Board or any key managerial
personnel, is charged with any responsibility including maintenance, filing or distribution of
accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to
take active steps to prevent, any default;
(v) any person in accordance with whose advice, directions or instructions the Board of
Directors of the company is accustomed to act, other than a person who gives advice to the Board in
a professional capacity;
(vi) every director, in respect of a contravention of any of the provisions of this Act, who is
aware of such contravention by virtue of the receipt by him of any proceedings of the Board or
participation in such proceedings without objecting to the same, or where such contravention had
taken place with his consent or connivance;
(vii) in respect of the issue or transfer of any shares of a company, the share transfer agents,
registrars and merchant bankers to the issue or transfer;
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Developers26. In the said decision, the Supreme Court had
underscored the necessity of construing the Master Circular
reasonably, in the matter of characterisation of anyone as a
wilful defaulter thereunder. Other judgments which were
relevant in this regard were Sukhwant Singh v State of
Punjab27, Subramanian Swami v UOI28 and Om Prakash
Chautala v Kanwar Bhan29.
(vii) Given the drastic consequences which ensued as a result
of declaration of someone as wilful defaulter, the validity of
such an order, when questioned, required a close scrutiny as to
whether it fell within the four corners of the Master Circular.
(viii) Adverting, after alluding to these aspects, to the core
issue of whether the respondent could be regarded as a wilful
defaulter within the meaning of the Master Circular, the learned
Single Judge observed and held as under:
(a) By order dated 28 November 2023, the learned
Single Judge had required the BOB to place, on record,
the evidence on the basis of which the Identification
Committee concluded that an event of wilful default had
occurred. In compliance therewith, the BOB had placed
the Minutes of Meeting dated 24 February 2020 on
record, under which it was decided to issue a show cause
notice to the respondent, proposing to declare him a
26 (2019) 6 SCC 787
27 (209) 7 SCC 559
28 (2016) 7 SCC 221
29 (2014) 5 SCC 417
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wilful defaulter. The annexure to the Minutes revealed
that the only evidence on the basis of which a decision to
treat the respondent as a wilful defaulter had been taken
was the FAR. There was no other document or reasoning
contained in the said Minutes of Meeting.
(b) Clauses 3(a) and (b) of the Master Circular
enjoined on the Identification Committee to examine the
evidence and conclude whether an event of wilful default
had, or had not, accrued. The words “examine” and
“conclude” involved application of mind, following a
process which was just, fair and reasonable. The Minutes
of Meeting date 24 February 2020, however, revealed
that the BOB had merely referred to the FAR before
issuing show cause notice to the respondent. No reasons
for arriving at a conclusion that an event of wilful default
had accrued, was forthcoming. No preceding documents
were referred to. The manner in which the matter had
been examined fell short of the necessary requirements.
The Identification Committee had, therefore, failed to
discharge its obligations envisaged in Clause 3(a) and (b)
of the Master Circular before issuing show cause notice
to the respondent.
(c) In his written submissions filed before the
identification committee by way of response to the show
cause notice, the respondent submitted that:
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(i) no investment had been made by MBIL in
its subsidiaries from any borrowed funds,
(ii) all investments were from internal
accruals/PE30 Funds/FCCBs31, and were disclosed
to the BOB in the audited financial statements
during the financial years 2003-2011,
(iii) these investments were evaluated at the time
of sanction of loan on 24 April 2010, and no
objection was raised,
(iv) the investments were also evaluated by the
lender banks at the time of formulation of the CDR
Scheme, and
(v) the writing off the investments in
subsidiaries took place between 01 April 2013 and
31 March 2015, after the respondent had exited
MBIL on 16 November 2012.
(d) Pursuant to the above response of the respondent to
the show cause notice, the Identification Committee
arrived at the view that, as substantial investments had
been made by MBIL in its subsidiaries and related parties
from its account, resulting in shortage of capital, the act
of making such investments amounted to
diversion/siphoning off, within the meaning of Clauses
2.1.3 (b) and (c) of the Master Circular. As such, the
respondent and Nita Puri (his mother) were wilful
30 Private Equity
31 Foreign Currency Convertible Bonds
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defaulters.
(e) The respondent filed a representation challenging
the decision and findings of the Identification Committee,
before the Review Committee. In the representation, it
was again reiterated that the investments made by MBIL
in its subsidiaries had been made from its own internal
accruals and were disclosed in its audited financial
statements. Besides they have been evaluated at the time
of sanction of credit facilities and approval of CDR and
no objections or concerns had been raised at that time.
These investments could not, therefore, suffice to
characterize the respondent as a wilful defaulter.
(f) The Review Committee, as already noted,
concurred with the decision of the Identification
Committee.
(g) The prime issue which arose for consideration was,
therefore, whether the investments made by MBIL in its
subsidiaries, amounted to “diversion or siphoning off”
funds within the meaning of sub-clauses (b) and (c) of
clause 2.1.3 of the Master Circular.
(h) The definition of “diversion of funds” in Clause
2.2.1 and “siphoning off funds” in Clause 2.2.2 of the
Master Circular made it clear that, in either case, the
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“borrowed funds”. When borrowed funds were used for a
purpose other than the purpose for which the loan was
sanctioned, it amounted to diversion or siphoning off. If
the investment was not of funds which had been
borrowed from the lender banks, the Master Circular was
not applicable. The Master Circular, therefore, also
required the lender bank to arrive at an objective decision
as to whether there had in fact occurred diversion of
funds or siphoning of funds.
(i) This, in turn, required an objective decision
regarding the source of the funds.
(j) The source of funds which were invested by MBIL
in its subsidiaries was available in the FRS, which was a
document prepared by the lender banks themselves in
2012, before the CDR scheme was finalised. Clause 1.3.2
of the FRS recorded the fact that MBIL had made
investments in its subsidiaries, which had been disclosed
in the Flash Report submitted by it. Significantly, Clause
5.1.2 of the FRS acknowledged that the investments
made by MBIL in its subsidiaries were funded by the
“substantial cash surplus,” generated by MBIL from
years 2006 and 2008. Clause 5.1.2 of the FRS, which so
stated, reads thus:
“5.1.2 Constrained ability to unlock value from
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• The company had chalked out a clear-cut long
term plan to strategically invest in the R&D
activities and to develop businesses around its
core technological and commercial focus areas.
In-line with its vision, it began making
strategic investments year after year. These
investments had been fully funded from the
substantial Cash Surpluses generated by the
company in earlier years – from FY-06
onwards and partially from FCCB issuance in
FY-08.
• At the time of making these investments, the
growth potential and expected profitability
from its core businesses and these businesses
were substantial – as were the access to capital
for each of these businesses. No one had
expected the unprecedented disruptions all
these related businesses had come to face
especially in FY-11.”
Thus, the lender banks, in their own FRS, acknowledged
the fact that the investments made by MBIL in its
subsidiaries were from its own cash surpluses from FY
2006 and 2008. These investments were not, therefore,
from “borrowed funds”. As such, the Master Circular was
not applicable. The issuance of the show cause notice
itself, thereby, stood vitiated.
(k) Inasmuch as this fact had not been taken into
account either by the Identification Committee or the
Review Committee, the order dated 23 March 2023,
passed by the Review Committee, was patently vitiated
by non-application of mind. The finding of the
Identification Committee, as well as of the Review
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Committee, that the investments made by MBIL in its
subsidiaries amounted to “diversion” and “siphoning” off
funds, within the meaning of Master Circular was,
therefore, not sustainable.
(l) Moreover, if the lenders had, during the CDR
process, found investments made by MBIL in its
subsidiaries as amounting to “diversion of funds”, MBIL
ought to have been placed in Class C and not in Class B.
(m) BOB sought to contend that placement of MBIL in
Class B during the CDR process was irrelevant, as the
lenders, at that time, did not have the advantage of the
FAR. This contention was unacceptable. In its counter-
affidavit, BOB had admitted that the lender banks were
all along aware of the investments made by MBIL in its
subsidiaries. The CDR Master Circular required the
lender banks to change the management of the company,
if there was “diversion of funds” and, wherever
necessary, also to carry out forensic audit of the
company. However, the lenders, including BOB did not
deem it necessary either to change the management of
MBIL or have its forensic audit conducted. In the FRS,
which was the banks own document, the investments
made by MBIL in its subsidiaries were never
characterised as diversion of funds. In these
circumstances, the mere fact that no FAR was available
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at the time of the CDR was irrelevant.
(n) In the circumstances, it had to be held that the
Identification Committee and Review Committee had
failed to discharge the obligations cast on them by Clause
2.2.2 of the Master Circular, which required them to
decide cases of wilful default objective, with application
of mind and after considering all relevant facts and
circumstances.
(o) BOB also sought to contend that, before making
investments in its subsidiaries, MBIL did not take prior
approval. This contention was also untenable. There was
no evidence of any objection having been raised, at any
time, to the investments made by MBIL in its
subsidiaries, though the lenders were aware of these
investments at all points of time. Rather, in the FRS,
these investments were regarded as potentially financially
sound. The question of obtaining prior approval arose
only if the investments were made using borrowed funds.
As it was an admitted position, in the FRS, that the
investments were made from cash surplus of MBIL, no
prior approval, before making the investments, was
required.
(p) Further, BOB had, vide its letter dated 20
September 2007 addressed to MBSL, intimated that,
against MBSL’s request or loan of ₹ 439.21 crores, DOB
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was able to provide only ₹ 292.82 crores and the balance
would have to be raised by MBSL through its promoters.
MBIL, as the 100% parent company of MBSL, had
infused the differential balance of ₹ 147 crores by way of
investments. This, therefore, was as per the advice of
BOB, and within its knowledge.
(q) Inasmuch as the investments by MBIL in its
subsidiaries were not out of borrowed funds, the writing
off of the investments, besides being in accordance with
Standard Accounting Practices, would not amount to
wilful default.
(r) In characterising the Respondent as a wilful
defaulter, the Identification Committee and Review
Committee had not acted in accordance with Clause 2.1.3
of the Master Circular, which required a default, in order
for it to be regarded as “wilful”, to be intentional,
deliberate and calculated. In the present case, at the time
of making investments, even the lender Banks found the
investments to contain potential and expected
profitability. On the investments later not succeeding in
realising returns, they could not be regarded as “wilful
default”.
(ix) The learned Single Judge thereafter proceeds to refer to
the FAR. The FAR as been found to lack credibility as it was
prepared without verifying the source of funds which were
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invested by MBIL in its subsidiaries, as specifically
acknowledged in Clause D (iv) of the FAR, thus:
“iv. Please further note that source of funds of the
investments made by the company in its subsidiaries,
associates and joint ventures were not verified by us as
these investments were made before our period of review.”
Without verifying and ascertaining that the investments made
by MBIL in its subsidiaries were out of “borrowed funds”, the
very issuance of show cause notice by the Investigating
Committee to MBIL was illegal. The genesis of diversion, or
siphoning, of funds, was in the funds themselves being
borrowed funds. Inasmuch as the only material relied upon, for
issuing show cause notice to MBIL and the Respondent, was
the FAR, and the FAR does not even examine the source of the
funds which were invested by MBIL in its subsidiaries, the
entire exercise of issuance of show cause notice to MBIL, and
all its sequelae, was completely misplaced.
27. Following the above observations and findings, the learned
Single Judge has, by the impugned judgment, concluded thus:
“154. The aforesaid provisions in the CDR scheme lead to the
conclusion that the categorization of a borrower in one of the
categories between A and D has to be based on an objective
satisfaction.
155. This Court is of the view that it is incumbent upon banks
who are dealing with public funds and discharging a public duty to
make appropriate enquiries as to whether a borrower is in genuine
financial difficulty or whether there exists any event(s) of fraud
and malfeasance. If the lender banks find fraud or malfeasance, the
CDR-EG must either refuse CDR completely or impose such
additional onerous conditions as provided in the CDR Scheme
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itself.
156. In the present case, the lender banks were aware of the
investments made by MBIL in its subsidiaries. This fact is part of
the documents leading to the finalization of the CDR scheme. The
investments were treated as strategic with growth potential and
expected profits. The investments were found to have been made
from the cash surpluses of MBIL. The lender banks did not find
these investments as diversion or siphoning of borrowed funds.
The lender banks placed MBIL in Class-B of CDR Master Circular
which cannot be assigned if there is diversion of funds. They found
no occasion to order a forensic audit of MBIL either before
finalization of CDR scheme or after its failure. The lender banks,
therefore, never treated the investments in subsidiaries as an act of
diversion or siphoning either during finalization of the CDR
scheme or after its failure.
157. In view of the aforesaid discussion, the reasons assigned in
the impugned order dated 23.3.2023 passed by the Review
Committee confirming the petitioner as wilful defaulter under the
Master Circular are unsustainable and therefore, the impugned
order is accordingly quashed and set aside. The petition is allowed
in the aforesaid terms and disposed of alongwith pending
application(s), if any.”
28. Aggrieved by the decision of the learned Single Judge, BOB
has filed the present appeal.
29. We have heard Mr. Kush Sharma, learned Counsel for BOB
and Mr. Vaibhav Mishra, learned Counsel for the Respondent, at
length. Both sides have also filed written submissions, which we have
considered.
Submissions and Analysis
30. Submissions of Mr. Kush Sharma
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30.1 Mr Sharma submits that BOB acted, at all times, in accordance
with the law. It became necessary to engage GSA & Associates as an
independent forensic auditor, as Banks are not experts in identifying
preferential, undervalued, fraudulent or extortionate transactions.
There is, therefore, no illegality in BOB acting on the basis of the
FAR submitted by the forensic auditor.
30.2 In his written submissions, Mr. Sharma has considered that the
FAR submitted by GSA & Associates did not conclude that the
investments made by MBIL in its subsidiaries amounted to diversion
or siphoning off funds. Nonetheless, the observations contained in the
FAR prompted BOB to issue a show cause notice to the Respondent.
Of the 6 allegations in the show cause notice, the Respondent was
ultimately declared a wilful defaulter only by confirming Allegation 1,
whereas Allegations 2 to 6 were dropped. Thus, the entire exercise
was objective and unprejudiced, and following due process. After
examining all aspects, including the reply submitted by the
Respondent to the show cause notice and after following the
procedure prescribed by the Master Circular of the RBI and
independent application of mind, the Identification Committee
“rightly concluded that Respondent was liable for diversion and
siphoning off funds with respect to transactions between MBIL and its
subsidiaries and related parties amounting to ₹ 1586.75 crores (which
included acts of provisioning and writing off). The Review Committee
also rightly concurred with the decision of the Identification
Committee, which was in sync with the opinion expressed in the FAR.
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30.3 In these circumstances, Mr. Sharma submits that the impugned
judgment of the learned Single Judge cannot sustain, and deserves to
be set-aside.
31. Submissions of Mr. Vaibhav Mishra
31.1 Mr. Vaibhav Mishra, appearing for Respondent, besides relying
on the observations and findings of the learned Single Judge, submits
that the balance sheets of MBIL, which were and continue to be in the
public domain, indicate that, every year between 2004 and 2011, the
value of the net current assets and fixed assets of MBIL far exceeded
its borrowings. This, even by itself, he submits, indicates that MBIL
utilised the borrowed funds for the purposes for which they were lent,
and that there was no mis utilisation at any point of time. In fact, as
per admitted balance sheets, MBIL had cash accruals of ₹ 4304 crores
during the period of alleged misutilisation. Reliance has been placed,
in this context, on the judgment of a Division Bench of the High Court
of Bombay in CIT v Reliance Utilities & Power Ltd32 for the
proposition that, if interest free funds are available to an assessee,
sufficient to meet its investments, and the assessee simultaneously
raises a loan, it can be presumed that the investments were from the
available interest free funds.
31.2 Mr. Mishra submits, further, that the Respondent, as well as all
other accused in the associated criminal proceedings33 by the Central
32 2009 SCC OnLine Bom 2169
33 CC No. CBI 92/2024
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Bureau of Investigation34 stand discharged by the learned Special
Judge, vide judgment dated 24 May 2025. The decision of the High
Court of Bombay in Reliance Utilities, he points out, has been relied
upon, by the learned Special Judge.
31.3 The CBI, too, concluded, after 6 years of investigation, that, as
“TRA was monitored account, therefore, diversion of loan funds
cannot be attributed to the company, as the funds were completely
under the control of the banks”.
31.4 Mr. Mishra further submits that, before approving MBIL’s
CDR package and issuing the FRS, the lenders, including BOB had
appointed E & Y, which had submitted its TEV Report on 9 June
2012, confirming that MBIL, and its investments, were viable and had
growth potential. This was recorded in great detail in the FRS. Even
the FAR concluded that, during the period of review, there was no
“opportunity for any diversion of funds”.
31.5 In conclusion, Mr. Mishra submits that the impugned judgment
of the learned Single Judge is comprehensive and detailed, and does
not admit of any exception whatsoever.
Analysis
32. The controversy in issue is empirically fundamental. The
Respondent has been declared a wilful defaulter by the Identification
34 “CBI” hereinafter
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Committee, whose decision has been affirmed by the Review
Committee. All that the Court has to see is whether the declaration of
the Respondent as a wilful defaulter conforms to substantive and
procedural due process.
33. “Wilful default” has been alleged to have been committed, by
the Respondent and MBIL in terms of sub-clauses (b) and (c) of
Clause 2.1.3 of the Master Circular. Clause 2.1.3 (b) applies where the
“finance from the lender” is not used for the specific purposes for
which it was availed, but is diverted for other purposes. Clause 2.1.3
(c) applies where the funds obtained from the lender are siphoned off,
so that they are not utilised for the specific purpose for which the
finance was availed and the unit has defaulted in meeting its
payment/repayment obligations to the lender.
34. Absent “diversion” or “siphoning” of the funds obtained from
the lender, i.e. the borrowed funds, therefore, Clause 2.1.3(b) and (c)
would not apply. This, by itself, would render the decision to treat the
respondent as a wilful defaulter illegal.
35. “Diversion” and “siphoning” of funds are defined by Clause 2.2
of the Master Circular. Apropos Allegation 1 of the allegations in the
show cause notice issued to him, which alone has confirmed and made
the basis of declaring the respondent a wilful defaulter, “diversion of
funds” would be construed to take place if borrowed funds are
transferred to subsidiaries or Group companies, and “siphoning off
funds” would be construed to take place if borrowed funds are utilised
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for purposes unrelated to the operations of the borrower.
36. The standard to be maintained while examining whether a
particular borrower is, or is not, liable to be treated as a “wilful
defaulter” is also clearly set out in the Master Circular. Clause 2.1.3
clearly states that the identification of wilful default has to be made
keeping in view the track record of the borrowers and should not be
decided on the basis of isolated transactions or incidents. In order to
be characterised as wilful, the default must be intentional, deliberate
and calculated. Every default, therefore, is clearly not a “wilful
default”. Clause 2.2.2 further states that the decision, as to whether
siphoning off funds has taken place, “would have to be a judgment of
the lenders based on objective facts and circumstances of the case”.
37. Characterisation as a “wilful defaulter” invites, in its train,
several penal measures, enumerated in Clause 2.5 of the Master
Circular. These include proscription on grant of any additional
facilities to the wilful defaulter by any bank or financial institution,
initiation of legal process and foreclosure of recovery of dues
expeditiously, initiation of criminal proceedings wherever necessary,
change of management of the wilfully defaulting unit and
incorporation, in loan agreements with companies entered into by the
banks or financial institutions to the effect that the borrowing
company should not induct, on its board, any person who is a wilful
defaulter. The learned Single Judge is correct in his estimate that these
measures, which would follow on declaration of a person or entity as
a wilful defaulter, would result in civil death. There has, therefore, to
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be strict and absolute compliance with the requirements of the Master
Circular, and absolute adherence to the degree of objectivity and
circumspection that is advised in the Master Circular, before taking a
decision to declare a person or an entity as a wilful defaulter.
Anything short of that degree of care and circumspection would
vitiate the decision in its entirety.
38. The impugned judgment of the learned Single Judge is detailed,
comprehensive and compendious. We can hardly do better than to
express our complete concurrence with the views expressed by the
learned Single Judge. In fact, two factors, even by themselves,
whether seen individually or together, would be sufficient to set aside,
in its entirety, the decision to declare the respondent as a “wilful
defaulter”.
39. The first is that “wilful default”, even as per Clause 2.1.3 of the
Master Circular, takes place only when borrowed funds are diverted
or siphoned off. The definition of diversion and siphoning off, as
contained in Clause 2.2.1 and 2.2.2 of the Master Circular, also
defined the misfeasances as covering only when borrowed funds are
transferred to subsidiaries or group companies or used for purposes
unrelated to the operations of the borrower, to the detriment of the
financial health of the borrower or of the lender. In any event, the
misfeasances has to occur with respect to borrowed funds.
40. The learned Single Judge has held that the investments in
MBSL, by MBIL, were not of borrowed funds, or funds lent by the
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banks, but of their own funds. This fact, notes the learned Single
Judge, is acknowledged even in the FSR prepared by the banks
themselves, in which it was specifically stated that the investments by
MBIL in its subsidiaries “had been fully funded from the substantial
cash surplus generated by the company in earlier years from FY 2006
and partially from FCCB issuance in FY 2008”. As the learned Single
Judge has correctly held, the investments in the subsidiaries were,
therefore, made from the internal accruals and cash surpluses of
MBIL, and not from borrowed funds. This being the acknowledged
position, even as per the documents of BOB and other lender banks in
the form of the FSR, there could be no question of any diversion or
siphoning off funds being alleged or, consequently, of MBIL or the
respondent being regarded as a “wilful defaulter”.
41. The second aspect, which completely demolishes the credibility
of the decision to declare the respondent as a “wilful defaulter”, arises
from two candid acknowledgements. The first is the
acknowledgement, in the Minutes of Meeting dated 24 February 2020
of the BOB, that the only evidence on the basis of which the
Identification Committee concluded that any event of wilful default
had occurred, was the FAR. The second is the acknowledgement, in
Clause D (iv) of the FAR, that the source of funds of the investments
made by MBIL in its subsidiaries has not been verified by GSA
Associates before drawing up the FAR on 3 June 2019. In other
words, the most important aspect which was to be objectively
assessed before declaring the Respondent as a “wilful defaulter”, i.e.,
whether the investments by MBIL in its subsidiaries were of
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“borrowed funds” was not examined by the FAR, and the FAR was
the sole material on the basis of which the Identification Committee
arrived at the conclusion that the respondent was a “wilful defaulter”.
Thus, the very proposal to declare the respondent as a “wilful
defaulter” was vitiated ab initio, as it was not preceded by any
assessment of examination of whether the investments by MBIL in its
subsidiaries were of “borrowed funds” or of its own accruals.
42. Each of these two aspects, even seen by itself, would be
sufficient to completely discredit, and justify setting aside of, the
decision to declare the respondent as a “wilful defaulter”. Seen
cumulatively, they fatally imperil the decision. We are in complete
agreement with the learned Single Judge in the view that he has
expressed in this regard.
43. Though the above reasoning is by itself enough to uphold the
impugned judgment of the learned Single Judge, we deem it
appropriate to supplement our conclusions with the following
additional reasons:
(i) At the time of approving MBIL for CDR, the CDR-EG
was duty-bound to satisfy itself that MBIL was in genuine
financial difficulty and in need of corporate debt restructuring.
This included an assessment of whether MBIL was engaged in
diversion or siphoning of borrowed funds. The learned Single
Judge has correctly rejected the submission of BOB, in this
regard, that, at the time of approving MBIL for CDR, the lender
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banks did not have, with them, the FAR. As has been correctly
noted by the learned Single Judge, Clause 3 of the Master
Circular of the RBI, governing the CDR Scheme, provided for
intensive scrutiny at the stage of approval of a unit for CDR. It
specifically required that, if the unit was found to have diverted
or siphoned funds, the management of the company was
required to be changed. Wherever necessary, the Banks were
also required to carry out a forensic audit of the company. The
fact that the Banks, including BOB, did not resort to either of
these alternative courses of action, despite being aware of the
investments made by MBIL in its subsidiaries, indicated that
BOB, and other lenders, were completely satisfied regarding the
financial feasibility as well as the bona fides of MBIL, and its
entitlement to restructuring via the CDR pathway.
(ii) The period of review, considered by GSA Associates was
2012-2015. As per the MRA dated 27 December 2012, all
inflow and outflow of MBIL’s funds had to take place, during a
majority of the period of review, through the TRA Account.
The TRA Account was directly monitored by all lenders. As
such, it could not lie in the mouth of the lenders, including
BOB, to contend that the investments made by MBIL in its
subsidiaries infracted Clause 2.1.3 (b) and (c) of the Master
Circular, resulting in an act of wilful default. It is nobody’s case
that MBIL had dealt with its monies or its accounts otherwise
than as required by the MRA.
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(iii) Every default – assuming a default had taken place – is
not “wilful default”, within the meaning of the Master Circular.
A default, in order to be wilful, had to be “intentional,
deliberate and calculated”. It cannot be said, by any stretch of
imagination, in the facts of the present case as were before the
learned Single Judge and as are before us, that any event of
“wilful default”, on the part of MBIL or the Respondent, had
taken place. It is inconceivable as to how the FAR arrived at
such a conclusion even without examining the source of funds.
The FAR, as well as the Identification Committee and Review
Committee, appear to have proceeded on a completely
misguided premise that investment of any funds of MBIL, in its
subsidiaries, would constitute diversion of funds. Clause 2.2 (c)
of the Master Circular sets this at rest, by envisaging only
transfer of “borrowed funds” to subsidiaries as diversion of
funds. Without a scintilla of material to indicate that MBIL had
transferred any borrowed funds to its subsidiaries, the FAR
came to a conclusion that MBIL had diverted its funds within
the meaning of the Master Circular.
(iv) Insofar as siphoning off funds is concerned, the position
is even worse, as siphoning off funds requires utilisation of
borrowed funds for purposes unrelated to the operations of the
borrower, to the detriment of the financial health of the entity or
of the lender. None of these ingredients have been shown to
exist. Further, Clause 2.2.2 of the Master Circular also requires
any decision, as to whether a particular instance amounts to
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siphoning off funds or not, to being the nature of judgment of
the lenders based on objective facts and circumstances of the
case. The words “judgment” and “based on the objective facts
and circumstances” cannot be regarded as mere tautology or
surplusage. They are specific expressions, obviously used for a
specific purpose. They indicate that the decision and
determination that siphoning off funds has taken place as to
partake of the nature of a quasi-judicial exercise in complexion,
even if it does not partake of all its procedural indicia. There
has to be deep and pervasive application of mind, and that is
sorely lacking in the present case.
(v) Tested on the above principles, it cannot be said that the
FAR makes out any conclusive case of diversion or siphoning
of funds by MBIL. The findings of the learned Single Judge in
this regard are unexceptionable. It was, therefore, wholly
inappropriate, on the part of the BOB, to commence wilful
defaulter proceedings against the respondent solely on the basis
of the FAR. In doing so, the BOB appears also to have failed to
realize the drastic consequences of declaring someone as a
wilful defaulter which, as we have already noted, is akin to a
civil death.
(vi) Another significant feature of Clause 2.1.3 of the Master
Circular is that it requires any identification of wilful default to
be made “keeping in view the track record of the borrowers”,
not based on any isolated transactions or incidents. This
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requirement is further qualified by adjectivizing the “wilful”
nature of the default as having to be “intentional, deliberate and
calculated”. Mens rea is, therefore, an indispensable element of
wilful default. There can be no innocent, or accidental, wilful
default. Further, there can be no presumption of wilfulness of
the default. The onus to establish the existence of every
ingredient of “wilful default”, within the meaning of the Master
Circular, is on the Banks or lenders; in other words, on the
Identification Committee and Review Committee. When one
examines the track record of MBIL, it has to be noted that, in
the period of twelve years starting FY 2006-2007, MBIL had
been subjected to three separate and independent forensic
audits, by Kashyap Sikdhar & Co. and Rajvanshi & Associates
and GSA & Associates, none of which detected any fraud or
diversion, much less siphoning off of funds. Even at the time of
approving the CDR, the CDR-EG gave MBIL a clean chit. Post
CDR, as already noted, all inflow and outflow of accounts took
place through the TRA, which was managed by the lender
Banks and maintained by the Central Bank. Not a single
proceeding was ever initiated against MBIL, at any point of
time. In the same context, it is worthwhile to note that MBIL
had accumulated cash accruals of ₹ 4304 crores as recorded in
its balance sheets, the veracity of which has not been disputed
by BOB.
44. We, like the learned Single Judge, are, therefore, not satisfied
that MBIL, or the respondent, can be characterised as a “wilful
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defaulter”, within the meaning of the Master Circular. Indeed, that
seems to have been the view of all concerned, including the lenders,
the Banks and the CDR-EG, till the FAR of GSA Associates. This is
why, quite obviously, the Minutes of Meeting dated 24 February 2020
of the BOB cited the FAR, and the FAR alone, as the basis for the
decision to issue show cause notice to the respondent. The FAR itself,
as we have already observed, does not commend itself to credibility.
45. It is a matter of no little significance, in this regard, that, in the
criminal proceedings initiated against the respondent by the BOB, all
accused, including the respondent, stand discharged by the learned
Criminal Court by a detailed and well-considered judgment. We do
not wish to say anything further, as we are not seized with the said
judgment, or any challenge thereto. Suffice it to state that the decision
of the Criminal Court, at the very least, fortifies our conclusions, as
well as the impugned judgment of the learned Single Judge.
46. We do not deem it necessary to say anything more, as the
impugned judgment of the learned Single Judge is eloquent, explicit,
and thoroughly reasoned. Any further comments by us would be
merely repetitive. We entirely endorse the reasoning and conclusions
of the learned Single Judge.
Conclusion
47. The appeal is therefore dismissed with no order as to costs.
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LPA 398/2024
48. This appeal, also at the instance of BOB, is directed against
judgment dated 1 March 2024, passed by the learned Single Judge in
WP(C) 4128/202335.
49. Several of the issues arising in this appeal, and in the impugned
judgment of the learned Single Judge, especially the scope of
examination by the Identification Committee and the Review
Committee, while declaring a borrower as a wilful defaulter, the
procedure to be followed in that regard, and the evidentiary value of
the FAR, among other issues, overlap with the discussion supra, in
respect of LPA 396/2024.
50. Nonetheless, there are certain distinctive features in the present
appeal, with which it is necessary to deal.
51. We may note, at the outset, that, as in the case of LPA
396/2024, we are entirely in agreement with the reasoning and
conclusion of the learned Single Judge in is judgment dated 29
February 2024 in WP (C) 4128/2023, from which the present appeal
emanates.
52. The respondent Ratul Puri was, in this case, declared as a wilful
defaulter by order dated 19 August 2022 by the Identification
Committee of BOB, whose decision was affirmed by the Review
35 Ratul Puri v Bank of Baroda
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Committee of BOB by order dated 23 March 2023. In this case,
however, the respondent was declared a wilful default with respect to
his association with MBSL, rather than MBIL. MBSL was a 100%
subsidiary of MBIL, which was engaged in the business of
manufacture of solar cells and modules. The respondent was
appointed as a director of MBSL on 29 March 2007.
53. BOB sanctioned credit facilities to MBSL on 20 September
2007, 22 February 2008, 5 April 2011 and 5 April 2013. Consequent
to a global financial crisis of 2008, there was a drastic fall in the prices
of solar panels, which were also being dumped in India by Chinese
companies at low prices. This resulted in MBSL facing financial
decline and a looming threat of loan re-payment default. As in the case
of MBIL, MBSL’s case was considered for CDR in accordance with
the CDR Master Circular of the RBI. A Flash Report was submitted
by MBSL on 24 March 2012, including a financial proposal for its
revival based on restructuring of its debt. In its meeting held on 7 May
2012, the CDR-EG decided to admit MBSL’s proposal to CDR. This
fact was noted by the lender banks vide letter dated 24 May 2012.
54. Punjab National Bank36 was nominated as the monitoring
institution. As with MBIL, MBSL was also placed, under the CDR
Master Circular, as a Class-B borrower.
55. A TEV study was called from Feedback Infra, economic
viability assessment from PNB Investments Services Ltd and Stock
36 “PNB” hereinafter
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Audit from M/s Mehrotra and Mehrotra, Chartered Accountants. This
was followed by JLMs on 20 July 2012 and 10 October 2012. After
taking into consideration the TEV study of Feedback Infra, the
economic viability assessment of PNB Investments Services Ltd and
the Stock Audit of M/s Mehrotra and Mehrotra, the JLM suggested
that the core strategy and operating plan of MBSL were technically
feasible. This was followed by an FRS of MBSL issued by the lender
banks, followed by a modified FRS on 21 January 2013.
56. On 18 March 2013, the CDR cell issued a letter stating that, on
21 January 2013, it had approved the proposed restructuring package
of MBSL. PNB was appointed as the Monitoring Institution. MBSL
was classified as Class B borrower, as a “corporate/promoter affected
by external factors and also having weak resources, inadequate vision
and not having support of provisional management”. Class C dealt
with corporates who have diverted funds, but MBSL was not
classified as a Class C borrower. On 28 March 2013, an MRA was
executed between MBSL and the lender banks restructuring MBSL’s
debt, followed by a TRA on 5 June 2013 and a supplementary MRA
dated 27 May 2014, the TRA required MBSL to transact, for its day to
day functioning, only through the TRA account. On 30 November
2016, the CDR cell decided to exit the lender banks from the CDR
package on account of the CDR failure. Following an application filed
by one of the creditors under Section 7 of the IBC, the NCLT, vide
order dated 14 November 2017, appointed an IRP. The IRP appointed
one Haribhakti & Co. LLP, Chartered Accountants, as the forensic
auditor of MBSL. Haribhakti submitted its FAR on 1 March 2019 to
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the IRP.
57. On the basis of the said report, BOB issued a show cause notice
to the respondent on 13 March 2020, proposing to classify him as a
wilful defaulter as MBSL had defaulted in meeting its loan repayment
obligations. The show cause notice contained four allegations of
which, subsequently, Allegations 1 and 2 were dropped and
Allegations 3 and 4 were confirmed.
58. Identification Committee declared the respondent as a wilful
defaulter on 19 August 2022. This order was confirmed by the Review
Committee on 23 March 2023, on the basis of Allegations 3 and 4.
59. Thus, while, in the case of WP(C) 4181/2023, leading to LPA,
396/2024, the respondent was declared a wilful defaulter by
confirming Allegation 1 apropos his relationship with MBIL, in this
case, the respondent was declared a wilful defaulter in respect of
Allegations 3 and 4 vis-à-vis his relationship with MBSL. The learned
Single Judge has, thereafter, considered the sustainability of the
decision to declare the respondent as wilful defaulter based on
Allegations 3 and 4 in the FAR of Haribhakti.
60. Allegation 3 was based on investments made by MBSL in
HPVL, despite the fact that HPVL was incurring continuous losses
since 2011-12.
61. In this context, the learned Single Judge has noted thus:
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(i) By order dated 28 November 2023, this Court directed
the BOB to place on record the document on the basis of which
the BOB had arrived at the satisfaction that show cause notice
was required to be issued to the respondents. The BOB placed
on record, by way of response, minutes of meeting dated 24
February 2020 which, as in the case of MBIL, indicated that the
only material on the basis of which BOB deemed it appropriate
to issue show cause notice to the respondents was the FAR of
Haribhakti. As in the case of MBIL, BOB was not justified in
issuing show cause notice to the respondents solely on the basis
of the FAR of Haribhakti. The fact that BOB was aware of the
investments made by MBSL in HPVL was also borne out from
email dated 6 October 2008 written by BOB to MBSL, in which
it was specifically stated that MBSL’s balance sheet indicated
that it had made investments in HPVL. The details of such
investments were sought, which were provided by MBSL by a
return email dated 7 October 2009.
(ii) The investments made by MBSL in HPVL were out of its
own funds raised from PE Investors, and were within the
knowledge of the lender banks from the beginning. They were
duly reflected in the financial statements and audited balance
sheets of MBSL.
(iii) Despite this, the respondent was categorised as a category
B defaulter, instead of category C, which applied to entitiesLPA 294/2024 and other connected matters
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which diverted or siphoned funds. This also indicated that BOB,
and the CDR-EG was, in full awareness of the investments
made by MBSL in HPVL, nonetheless of the view that MBSL
had not diverted or siphoned any funds. There was no
justification, therefore, much later in time, to allege that the
investments made by MBSL in HPVL amounted to diversion of
funds within the meaning of the Master Circular.
(iv) The Flash Report submitted by MBSL as part of the CDR
scheme in 2012 also disclosed the investments made by it in
HPVL. In its letter dated 18 March 2013, which approved the
restructuring package, BOB had noted the investments made by
MBSL in HPVL. It was specifically stated, in this regard, as
under:
“(iii) Sale of surplus assets/ investments
There are no significant surplus assets/ investments
proposed for sale.
The investments are towards equity and preference share
capital in its 100% fully owned subsidiary MBPV. These
investments are required to be retained in terms of non-
disposal undertaking executed with secured lenders of
MBPV. Hence, no disposal of these investments is
proposed.”
(v) In the FRS, which was a document of BOB issued before
the finalisation of the CDR package, it was again noted that
MBSL had made investments in HPVL and that the investment
was required to be retained as it was a strategic investment, as
HPVL supplied PV cells to MBSL in its assembly modules. The
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relevant paragraph from the FRS read thus:
“2.3 Comments on financial position and working results
…the Long-Term Surplus of Rs. 429.88 crore during FR
2008-09, which was used towards the following during FY
2010 to FY 2012.
a) ******
b) ******
c) *******
d) Investments in wholly owned subsidiary – MBPV
Investments:
The investments are towards equity and preference share
capital in 100% fully owned subsidiary MBPV. These
investments are required to be retained in terms of non-
disposal undertaking executed with secured lenders of
MBPV. Further, investment in MBPV is strategic
investment, whereby MBPV supplies PV cells to MBSL in
its assembly of modules.”
(vi) In its counter affidavit filed by way of response to the
writ petition, the justification provided by BOB for regarding
the investments made by MBSL in HPVL to amount to wilful
default, despite BOB having had full knowledge of the said
investments at all points of time, was that MBSL continued to
invest in HPVL even though HPVL was incurring losses since
2011-2012. This was a manifestly unacceptable stand. The FAR
itself nowhere regarded the investments made by MBSL in
HPVL as diversion of funds. Rather, the FAR stated, “owing to
inadequacy of documents explaining arrival, basis and
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need of such investments. Further, considering the current
financial status of HPVL, recovery of these investments seems
to be doubtful.” The FAR, therefore, had not arrived at any
conclusion that the investments made by MBSL in HPVL
amounted to diversion of funds.
(vii) At all points, in the CDR process, therefore, the MBSL
was directed to retain its investments in HPVL, as they were
found to be strategic in nature. It could not, therefore, be said
that the investments were misguided or ought not to have been
made or that MBSL should have recouped the amounts so
invested.
(viii) Clause 2.1.3 read with clause 2.5 of the Master Circular
required any “wilful default” to be intentional, deliberate and
calculated, based on objective facts and circumstances of the
case. Transferring funds to a subsidiary would amount to wilful
default, only if, it was intentional, deliberate and calculated. The
FAR did not even come to a conclusion that the investments
made by MBSL in HPVL amounted to diversion of funds much
less that it was intentional, deliberate or calculated. The
decision to issue show cause notice, as was apparent from the
minutes of meeting dated 24 February 2020, was based solely
on the FAR and on nothing else. Clearly, therefore, the decision
was misguided.
(ix) In this context, it was also necessary to note that even
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after making investments in HPVL, MBSL created fixed assets
of ₹ 477.46 Crores which implied that the loan amount was
used for the purpose for which it was granted. The investment
in HPVL was towards creation of fixed assets, as it
manufactured PV cells, which was a critical component for
solar cells manufactured by MBSL. Investments made for
creation of assets, which supported the main business of MBSL,
could not be regarded as diversion of funds.
62. Following this discussion, the learned Single Judge holds that
allegation 3 against the respondent, qua his directorship in MBSL, was
not made out.
63. Allegation 4, had been found by the Identification Committee to
be an act of wilful default as MBSL had engaged in trading activities
in the course of which it had purchased from and sold to HPVL
amounting to ₹ 173.34 crores and ₹ 93.47 crores respectively.
64. In this context, the learned Single Judge observes as under:
(i) FAR noted that forensic auditor was unable to verify
actual movement of goods against these amounts.
(ii) These amounts were also duly reflected in the financial
statements of MBSL and in its balance sheet to which BOB had
access at all times.
(iii) Despite this, MBSL was placed in Category B of the
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CDR Master Circular and not in category C, which deals with
units which diverted funds.
(iv) The FAR could not be regarded as having treated the
aforesaid amounts, involved in the sale and purchase
transactions between MBSL and HPVL as amounting to
diversion of funds as it was admitted position in the FAR that
owing to non-availability of supporting documents, the forensic
auditors were unable to verify actual movement of goods
against the purchase and sale transaction. The FAR, therefore,
at worst, remained inconclusive.
(v) The decision to issue show cause notice to the respondent
in respect of allegation 4, too, therefore, did not meet the
standard investments envisaged in the Master Circular, which
required an act of wilful default to be intentional, deliberate and
calculated and for the bank and the CDR-EG to arrive at a
conclusion in that regard of objective assessment of all the
materials including the prior history of the borrower.
65. Following the above discussion, the learned Single Judge has
held that allegation 4 was also not made out against the respondent
and could not, therefore, constitute a basis to issue show cause notice
to him.
66. The learned Single Judge has further held, relying on the
following passages from the judgment of the High Court of Calcutta
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in Prashant Bothra v Bureau of Immigration37, that the FAR was, at
best, entitled to the status of the expert opinion, which could not be
regarded as conclusive proof of the allegations of finding contained
therein:
“21. The very premise of the request was a forensic audit report
allegedly authored by a particular concern. The said report, at best,
is a piece of evidence in the liquidation proceeding and is in no
manner conclusive proof of evidence of any illegality committed
by any entity. In fact, it is common experience that each and every
such forensic audit report contains several disclaimers, restricting
the operation of the same to the proceeding in which they are filed,
as well as confined to the impression of the authors thereof on the
basis of the documents which are available to them.
22. Under no stretch of imagination can such a report be
conclusive proof of the allegations against the petitioners.”
The learned Single Judge has expressed his concurrence with the
decision of the High Court of Calcutta, and we do likewise.
67. We are in entire agreement with the learned Single Judge that
the Master Circular does not envisage categorisation of a borrower as
wilful defaulter without the requisite degree of circumspection and
examination. The bank, in each case, was not justified in mulcting the
respondent with “wilful defaulter tag” solely on the basis of the FAR,
without any independent analysis. The factors which are required to
be borne in mind, while declaring a borrower as wilful defaulter are
set out in the Master Circular itself, but they do not appear to have
engaged the attention of the banks before issuing show cause notice to
the respondent, in each case. The Identification Committee and the
37 2023 SCC OnLine Cal 2643
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Review Committee have also proceeded merely on the basis of the
allegation and certain observations in the FAR, ignoring the fact that
the FAR in each case itself noted that the requisite details were not
available with the concerned Chartered Accountant Firm before
issuing the FAR. The observations in the FAR, therefore, were, at
best, tentative.
68. These are all factors which form part of the “objective facts and
circumstances of the case” which Clause 2.5 of the Master Circular
required the bank to bear in mind, while examining whether the
borrower had committed “intentional, deliberate and calculated” acts
of wilful default.
69. The learned Single Judge is, therefore, entirely correct in his
view that the decision to categorize the respondent as wilful defaulter
is not arrived at after undertaking the exercise envisaged by the Master
Circular.
70. We also agree with the learned Single Judge that the decision to
issue show cause notice to the respondent, followed by the decision of
the Identification Committee, and the Review Committee, have
entirely ignored the contents of the FRS, which is a document of the
bank itself, at the time of approval of the CDR restructuring of the
MBSL/MBIL. In the present case, paras 92 to 96 of the impugned
judgment of the learned Single Judge merit reproduction:
“92. In the FRS, the lender banks have noted that MBSL is a
subsidiary of MBIL and engaged in the manufacturing of
photovoltaic cells. The company used the SEZ Unit in Greater
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Noida to design, manufacture, sell, export photovoltaic cells in the
global market. It had a production capacity of 90 MW selective
emitter crystalline cells, 50 MW crystalline modules and 40 MW
Thin Films PV. The company began its commercial operations at
an initial cost of Rs.439.21 Crores. In 2011, the company
consolidated and set up project for advanced high performance
selective emitter high efficiency crystalline silicon cell with annual
capacity of 90 MW. The cost of this project was Rs.624.69 Crores.
The company demonstrated strong EPC capabilities and quality
manufacturing. It has commissioned more than 50 PV projects in
India and Germany. The company has significant customer base in
Europe, Asia, Pacific, Middle East and the US.
93. The FRS noted that 2011-12 onwards, the company’s
financial operations were adversely affected due to (a) global solar
photovoltaic market was operating under stress due to huge supply
addition from China; (b) China offering USD 43 billion subsidy to
its domestic companies, which led to abnormal fall in the prices of
solar cell. The company, however, has been able to service its debt
till 31.12.2011. The CDR-EG had admitted MBSL in Class-B as
per the CDR Master Circular, which applies where MBSL was
classified as Class-B borrower under the CDR Scheme, which has
Classes from A to D. In the Class-B category, MBIL was classified
as “Corporate/promoters affected by external factors and also
having weak resources, inadequate vision and not having support
of professional management.” Class-C is assigned to those
corporates who “diverted funds” to unrelated fields with or without
lenders’ permission. Thus, the lender banks considered MBSL to
be a borrower which was affected by external factors and not by
diversion of funds.
94. Before finalization of the CDR package, the lender banks
obtained a TEV Report and Stock Audit Report from external
agencies. After considering the said Reports, the lender banks
approved the CDR package. The net worth of MBSL even as on
31.3.2012 was found to be Rs.658.66 Crores.
95. In the Flash Report, it is noted that MBSL could service all
its debts till 30.11.2011 and even repaid the principal sum of the
term loans.
96. The aforesaid position, which is accepted by the lender
banks in their own document i.e., the FRS, does not show a
consistent negative track record of MBSL. MBSL was seen as a
global player in photovoltaic cells. It had presence in several
countries. It had serviced its debt and largely repaid the principal
dues. The Respondent Bank, under Clause 2.1.3 read with ClauseLPA 294/2024 and other connected matters
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2.5 of the Master Circular, was obligated to reflect upon the entire
track record of MBSL and then conclude whether there existed
events of Wilful Default and not on the basis of isolated
transactions/incidents.”
71. The factors noted by the learned Single Judge in paras 92 to 96
of the impugned judgment were also required to be borne in mind by
the bank before arriving at a conclusion that the respondent was a
wilful defaulter.
72. For all these reasons, we are of the opinion that the learned
Single Judge has correctly exercised his jurisdiction even in respect of
the judgment forming subject matter of challenge in the present appeal
which is, therefore, upheld in its entirety.
73. The appeal is consequently dismissed.
LPA 357/2024
74. This LPA assails judgment dated 29 February 2024 of the
learned Single Judge in WP (C) 9491/202338, which, in turn,
challenged order dated 13 July 2022, of the Identification Committee,
declaring the respondent as a wilful defaulter as well as order dated 20
April 2023 of the Review Committee, confirming the said decision.
75. The dispute in these proceedings is largely analogous to that in
the writ petitions involving BOB. PNB was also one of the lenders of
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MBSL. Consequent on MBSL failing to repay the loans extended to it
by PNB, MBSL‘s case for CDR was considered in terms of the CDR
Master Circular. MBSL submitted its Flash Report on 24 March 2012.
In its meeting dated 7 May 2012, the CDR-EG decided to admit the
proposal of MBSL for CDR, and nominated PNB as the monitoring
institution. PNB was also entrusted to prepare the final draft FRS.
MBSL was categorized as a Class-B borrower.
76. On 20 July 2012, a JLM was convened to discuss the final CDR
package of MBSL. This was followed by a second JLM on 10 October
2012. In the second JLM, the technical viability study of MBSL
received from Feedback Infra, the economic viability assessment
received from PNB Investments Services Ltd and Stock Audit Report
from Mehrotra and Mehrotra were considered. The core strategy and
operating plans of MBSL were found to be technically feasible. On
that basis, a final FRS of MBSL was issued by the lender banks,
followed by a modified FRS on 21 January 2013.
77. The CDR-EG approved the proposed restructuring package of
MBSL on 21 January 2013. In accordance therewith, an MRA was
executed on 28 March 2013, restructuring the debt of MBSL, followed
by a supplementary MRA on 27 May 2014. MBSL and the lender
banks executed the TRA on 5 June 2013.
78. However, as MBSL failed to liquidate its loans, the CDR cell
decided to exit the lender banks from the CDR package on 30
November 2016.
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79. Following an application filed by a financial creditor under
Section 7 of the IBC, the NCLT appointed an IRP vide order dated 14
November 2017. Haribhakti was appointed by the IRP as a forensic
auditor. Haribhakti submitted its FAR on 1 March 2019.
80. On the basis thereof, PNB issued a show cause notice to the
respondent on 9 April 2019 proposing to classify him as a wilful
defaulter under the Master Circular. The respondent replied, following
which on 7 February 2020, the Identification Committee of the PNB
declared the respondent as a wilful defaulter.
81. This decision was, however, withdrawn, following which a
second show cause notice was issued by PNB to the respondent on 10
June 2020, alleging wilful default. This was followed by a third show
cause notice on 14 February 2022.
82. Vide order dated 13 July 2022, the Identification Committee
declared the respondent as wilful defaulter. The decision was
confirmed by the Review Committee on 20 April 2023, resulting in
the respondent instituting WP (C) 9491/2023 before this Court.
83. The learned Single Judge copiously refers to his order dated 29
February 2024 in WP (C) 4181/2023, from which has emanated LPA
396/2024, emphasizing that the issues in that writ petition and the
present writ petition were largely identical, legally speaking.
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84. In the present case, too, the learned Single Judge, by order date
28 November 2023, directed the PNB to place, on record, the
documents evidencing the satisfaction arrived at, by the PNB, to issue
show cause notice to the respondent. In response, the PNB placed on
record the minutes of the meeting dated 8 November 2019. A perusal
thereof discloses that the only basis for the decision to issue a show
cause notice to the respondent was the FAR of Haribhakti. The
learned Single Judge has, therefore, reiterated his view – with which
we entirely concur – that solely on the basis of the FAR of Haribhakti
and without any independent application of mind as to whether there
was any intentional, deliberate or calculated default by the respondent,
on the basis of the overall facts and circumstances, the PNB could not
have taken a decision to issue a show cause notice to the respondent.
85. The learned Single Judge has thereafter proceeded to examine
whether, on facts, the conclusion that the respondent had committed
acts of wilful default was at all sustainable. In this case, the learned
Single Judge has noted that there were two grounds, relied upon by
the Identification Committee, to declare the respondent as a wilful
defaulter. The first was that MBSL had given interest-free deposit of ₹
135.50 crores to MBIL under various lease agreements, which was
upto 58.82 times the yearly rentals. The second was that MBSL had
executed financial lease agreements with MBIL, so that, instead of
utilizing the utilities on its own, MBSL leased back the utilities to
MBIL on operating lease. Both these acts, according to Identification
Committee, constituted diversion of funds within the meaning of
Master Circular.
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86. The learned Single Judge has examined each of these
allegations independently.
87. Apropos the interest-free deposit of ₹ 135.50 crores given by
MBSL to MBIL under various lease agreements, the learned Single
Judge has observed that they were refundable security deposits and
could not, therefore, be regarded as diversion of funds. The
observation that they were 58.82 times the yearly rentals was found to
be factually incorrect as the total security deposit was only 3.05 times
the yearly rental. A chart evidencing this had been placed on record by
the respondent, which had not been controverted by PNB. As such, the
allegation that by providing interest-free deposit of ₹ 135.50 crores to
MBIL, MBSL had committed an act of wilful default, was found to be
predicated on factually wrong premise.
88. Besides, even commercially speaking, the learned Single Judge
has found the deposits to be justified and viable. As per the agreement
entered into with M/s Applied Materials, US, for supply of thin film
solar module line, MBSL was required to establish a manufacturing
unit. MBIL, the holding company of MBSL, had 27.5 acres of land in
Greater Noida as an SEZ. MBIL was approved as the developer of
SEZ. MBIL, therefore, developed the requisite infrastructure,
including buildings and manufacturing facilities, at the SEZ, for ₹
353.53 crores, which were then given by MBIL to MBSL on financial
and operating leases of 7 to 20 years duration.
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89. Even after paying the security deposit and annual rental, MBIL,
from these lease agreements, made only a 12.8 % internal rate of
return, which could not be said to be extraordinary. The commercial
lending rate, at that time, was around 13 %, so that 12.8% on
investments represented a fair return. All these facts had been
tabulated by the respondent in his writ petition, and they did not
objectively establish that the lease agreements were intentional,
deliberate and calculated acts of wilful default. Having thus found
that, on facts, the lease agreements did not represent acts of wilful
default on the part of MBSL, the learned Single Judge has gone on to
examine the FAR. As the lease agreements had been executed prior to
the review period in respect of which the FAR was issued, the auditors
did not have the requisite documents before them. The FAR itself
concluded that, in the absence of supporting documents justifying
agreed rates for leased assets, lease income, electricity and water
charges, the lease agreements were questionable. Thus, the finding to
that effect, by the FAR, could not be said to represent any conclusive
finding that, by executing the lease agreements, MBSL had diverted
any borrowed funds.
90. Thus, the finding of diversion of funds, on the basis of the lease
agreements executed by MBIL was arrived at, by the Identification
Committee, on its own, without any such suggestion in the FAR and
without any supportive material.
91. The learned Single Judge then examined the second ground
relied upon by the Identification Committee as constituting wilful
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default on the respondent’s part. This was that, instead of utilizing the
utilities, MBSL leased back the utilities to MBIL on operating lease.
92. This conclusion was also found to be unsustainable. The SEZ
was owned by MBIL. Lease agreements were executed by MBIL to
enable MBSL to manufacture in the SEZ. As per the approval letter
issued by the Ministry of Commerce, Govt. of India, the right and
responsibilities to operate utilities in the SEZ exclusively remained
with MBIL. As per approval dated 22 May 2007, MBSL only received
permission to manufacture thin film and crystalline silicon based solar
modules. To comply therewith, however, MBSL had necessarily to
give back the operation of power generation and utility assets for the
operations to MBIL on operating lease. Against these leases, MBIL
agreed to pay MBSL lease rent of ₹ 382.77/- crores.
93. Thus, over a period of 10 years, MBIL would have paid MBSL
an amount of ₹ 382.77 crores under the operating leases, against ₹
390.05 crores paid by MBSL to MBIL under the financial leases.
Thus, there was no significant loss or profit made by either MBSL or
MBIL in these transactions. MBSL, in fact, made a financial gain of ₹
5.46 crores. Thus, it was found that no diversion of funds could be
alleged.
94. Moreover, in Clause 13 of its Flash Report, MBSL categorically
disclosed the details of the financial and operating lease agreements
executed with MBIL. Thus, even at the time of consideration of
MBSL’s case for CDR, the CDR-EG, including the PNB, was fully
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aware of the lease agreements and the nature of the transactions.
Despite this, the restructuring package was approved by the CDR-EG
on 18 March 2013, in Clause 9 of Schedule 1 thereto, the banks again
acknowledged that MBSL had leased liabilities towards MBIL.
95. Even after approval of the CDR package, the lender banks
issued the FRS, as their own internal document which contained no
adverse findings against MBSL regarding the lease agreements.
Subsequently, the lender banks, including PNB, entered into MRA
and TRA with MBSL without demur.
96. In such circumstances, the learned Single Judge has observed
that the decision to categorize the respondent as a wilful defaulter was
arrived at, by the Identification Committee, without examining the
matter in the manner required by the master circular and confirmed by
the Review Committee in a mechanical fashion.
97. A third ground, on which the Identification Committee regarded
the respondent as a wilful defaulter, was that MBSL had made
investments of ₹696.49 crores in HPVL without the approval of the
lenders.
98. Apropos this, it is not necessary for us to reiterate the findings
of the learned Single Judge, as the situation is identical to that
regarding the investments made by MBIL in MBSL, forming subject
matter of LPA 398/2024. As in that case, the investments by MBSL in
HPVL were not made out of borrowed funds but from funds raised by
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the PE Investors.
99. Moreover, HPVL was a strategic investment made by MBSL.
The investments were duly reflected in the financial statements and
audited balance sheets of MBSL, to which the lender banks always
had access and of which they were fully aware. The investments were
also disclosed in the Flash Report submitted by MBSL. Even in the
JLM meeting dated 10 October 2012, the representative of PNB
Investment Services Ltd explained that long term funds had been
utilized by MBSL for investment on subsidiaries. While approving
the CDR package, MBSL was advised to retain the said investments
and not to dispose of them. Even in the FRS issued by the lender
banks, the investment made by MBSL in HPVL was noted. It was
observed that the investment was required to be retained as it was a
strategic investment, as HPVL was the supplier of PV cells to MBSL
for use in its assembly modules.
100. Finally, after all these, MBSL was characterized only as a Class
B borrower, and not as a Class C borrower, though entities which
resorted to diversion of siphoning of funds had to be treated as Class
C borrowers.
101. In these circumstances, the learned Single Judge has held that
the investments made by MBSL in HPVL could also not be regarded
as diversion of funds.
102. Following this, the learned Single Judge has dealt with the
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value and effect of the FAR and the responsibilities of the
Identification Committee to which we have already alluded earlier.
103. As in the case of the judgments of the learned Single forming
subject matter of appeal in LPA 396/2024 and LPA 398/2024 and, for
the same reasons, we do not find that any case exists, for us, to
interfere with the extremely well-considered decision in WP(C)
9491/2023.
104. This appeal is also, therefore, dismissed.
LPA 294/2024
105. This appeal arises out of order dated 29 February 2024 passed
by the learned Single Judge in WP (C) 10568/202339.
106. The learned Single Judge has found this case to be identical to
WP (C) 9491/2023, involving an identical challenge.
107. For the reasons adduced in his judgment dated 29 February
2024 in WP(C) 9491/2023, the learned Single Judge has allowed WP
(C) 10568/2023 as well.
108. Equally, for the reasons stated by us in LPA 357/2024, arising
out of WP (C) 9491/2023, we uphold the decision of the learned
Single Judge in WP (C) 10568/2023 as well.
39 Nita Puri v PNB
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109. This appeal is also, therefore, dismissed.
A Parting Note
110. Article 226 jurisdiction is, classically, not appellate in nature.
Nonetheless, keeping the overwhelming element of public interest that
permeates the Master Circular, and its implementation, the learned
Single Judge, we feel, rightly entered into the merits of the findings of
the Identification Committee and the Review Committee. We
reiterate, most emphatically, the finding of the learned Single Judge
that the categorization of a borrower as a “wilful defaulter” under the
Master Circular cannot be a superficial exercise. In arriving at such a
decision, the Master Circular envisages thorough scrutiny at four
stages; first, in the drawing up of the FAR, secondly, at the stage of
examination of the FAR and arriving at a conclusion as to whether the
observations and findings therein justify a conclusion of wilful
default, so as to require the borrower to show cause; thirdly, by the
Identification Committee in arriving at the said conclusion after
examining the response of the borrower to the show cause notice and,
fourthly, by the Review Committee in examining the findings of the
Identification Committee and the representation of the borrower
thereagainst. At each stage, the scrutiny has to be precise and
thorough. Most importantly, it has to be borne in mind that the default
has to be intentional, deliberate and calculated. Every default is not a
“wilful default” within the meaning of the Master Circular. Clearly,
the expression “wilful” embodies a far stricter connotation, and
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standard, than its normal etymological confines. In arriving at a
conclusion regarding wilful default, at each stage, the examination has
to be based on an objective examination of the facts and circumstances
of the case. Isolated, or stray, incidents of default cannot be regarded
as wilful default, and the decision has also to factor in the track
record of the borrower. Facts which were known at the time of
approval of the CDR package, and which were not regarded as wilful
default at that time, cannot suddenly be regarded as wilful default at a
later stage, without any additional material justifying such a change in
stance. The categorization of the borrower is a factor of no little
significance in this regard. If a borrower is diverting, or siphoning,
funds, he has to be placed in the appropriate category. Holding a
borrower, who is in Category B, to be a wilful defaulter, is ex facie
incongruous. Again, while arriving at the conclusion of diversion or
siphoning of funds, the meaning and import of the expressions, as
defined in the Master Circular, has scrupulously to be borne in mind.
In either case, the funds have to be borrowed funds. At each stage,
therefore, there has to be a conscious examination of whether the
funds, the dealing with which is being regarded as an act of wilful
default, were, or were not, borrowed funds. The financial wherewithal
of the company is also to be borne in mind, while arriving at this
decision. If the funds were not “borrowed funds”, there can, ipso
facto, be no allegation of wilful default.
111. Though the impugned judgments keep all these factors in mind,
we deemed it appropriate to paraphrase them, keeping in mind the
drastic consequences of holding a borrower to be a wilful defaulter.
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We are constrained, moreover, to enter this comment as we find, in
these appeals, that the financial auditor, in the FAR, has
acknowledged that all details, or facts, were not available with it.
Unless the financial auditor is in possession of all facts and details, it
cannot return even a tentative opinion on whether there has been
diversion or siphoning of funds. An FAR which is issued without
being possessed of all the necessary factual material and statistical
details is really worthy of little credibility, and cannot constitute the
basis for proceeding against the borrower for declaring him a wilful
defaulter either under the Master Circular, or, we may venture to add,
in any cognate proceedings either. While dealing with the issue of
whether a borrower is, or is not, a wilful defaulter, and implementing
the provisions of the Master Circular, the exordium of the Supreme
Court in Jah Developers has to be borne in mind. The authorities, at
all stages, have to be alive to the fact that a declaration of wilful
default, within the meaning of the Master Circular, results in civil
death. Strict compliance with the Master Circular, in scrupulous
consciousness of its clauses and indicia is, therefore, the indispensable
sine qua non.
A note of appreciation
112. Before parting, we express our appreciation of learned Counsel
Mr. Kush Sharma for the appellants and Mr. Vaibhav Mishra for the
respondents, who aided us in disposing of these appeals by presenting
submissions which were crisp and precise.
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Conclusion
113. All these appeals are, therefore, dismissed, with no orders as to
costs.
C. HARI SHANKAR, J.
AJAY DIGPAUL, J.
AUGUST 8, 2025
dsn/yg/aky/ar
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