Bombay High Court
Ankit Bhuwalka vs Idbi Bank Limited on 16 January, 2025
Author: Neela Gokhale
Bench: Revati Mohite Dere, Neela Gokhale
2025:BHC-OS:751-DB
901-WP-12-2025-J-.doc
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO.12 OF 2025
Ankit Bhuwalka
Erstwhile Director of
Bhuwalka Steel Industries Limited,
Flat No. B1 101, Oberoi Esquire,
Oberoi Garden City, Opposite
Oberoi Woods, Goregaon East,
Mumbai, Mumbai Suburban,
Maharashtra - 400063 .....Petitioner
Vs.
1. IDBI Bank Limited
Acting through Chief General
Manager / Authorized
Signatory, Wilful Defaulters
Review Committee
Having its registered office at,
IDBI Tower, WTC Complex,
Cuffe Parade, Mumbai 400005
2. Union of India
Room No. 272, 2nd Floor,
Aaykar Bhavan, Maharshi Karve Road,
New Marine Lines, Churchgate,
Mumbai-400020,
Maharashtra .....Respondents
Mr. Simil Purohit, Senior Advocate, with Ms. Supriya Majumdar, Mr.
Rishabh Chandra i/b Vaish Associates, for the Petitioner.
Mr. Prakash Shinde, with Mr. Harsh Sheth, Ms. Niyati Merchant i/b
MDP Legal, for the Respondent No.1-IDBI Bank
Mr. Mohamedali M. Chunawala, for Respondent No.2.
Shivgan 1/33
::: Uploaded on - 17/01/2025 ::: Downloaded on - 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
CORAM : REVATI MOHITE DERE &
DR. NEELA GOKHALE, JJ.
RESERVED ON : 10th JANUARY 2025.
PRONOUNCED ON : 16th JANUARY 2025. Judgment: (Per Dr Neela Gokhale J.) 1) Rule. Rule made returnable forthwith. With consent of the
parties the matter is taken up for final hearing.
2) The Petitioners seek quashing of Show Cause Notice
(‘SCN’) dated 5th April 2023 issued by the Respondent No.1-Bank
and Order dated 14th September 2023 issued by the Wilful Defaulter
Committee of the Bank. He also assails the subsequent Order dated
25th October 2024 passed by the Wilful Defaulter Review Committee
(‘WDRC’) and Order dated 13th June 2024 issued by the Wilful
Defaulter Committee (‘WDC’).
3) The Petitioner is the erstwhile Director of the company
known as Bhuwalka Steel Industries Limited (“BSIL”). Pursuant to a
resolution of BSIL, under the Insolvency and Bankruptcy Code, 2016
(‘IBC’), the company came under the control of a new management.
The Petitioner is essentially aggrieved by orders passed by the
Respondent No.1 declaring him as Wilful Defaulter on the basis of a
Shivgan 2/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
Transaction Audit Report (‘TAR’) prepared by one M/s. G.D. Apte &
Co. at the behest of the erstwhile Resolution Professional (‘RP’) of
BSIL. His main grievance is that he was deprived of a substantial
opportunity of being heard inasmuch as the documents on the basis of
which a decision to declare him as Wilful Defaulter was taken, were
not provided to him and the TAR relied upon by the Respondent No.1
was held by the NCLT, Bengaluru Bench to be based on surmises and
conjectures.
4) The facts of the case reveal that in 2018, a Company
Petition (IB) No. 228/BB/2018 was filed by one Indu Corporation
Private Limited against BSIL before the NCLT, Bengaluru Bench. The
Petition was admitted by the NCLT on 8 th April 2019 under the
Corporate Insolvency Resolution Process (‘CIRP’) and one Mr.
Shivadutta was confirmed as RP. During the course of the CIRP, M/s.
G.D. Apte & Co. were appointed as auditors by the RP to carry out
the transaction audit/ forensic audit of the BSIL. Based on the findings
in the TAR, the RP filed an application before the NCLT alleging that
certain fraudulent transactions had taken place in BSIL including
certain related party transaction between BSIL and its group company,
called Shree Durga Trade Links Private Limited (‘SDTL’). It transpires
Shivgan 3/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
from the observation made in the order dated 10th March 2021
passed by the NCLT that the forensic audit report/transaction audit
report was based on surmises and conjectures and only assumed that
the transactions were fraudulent. The NCLT observed that the said
Report seemed to be based on assumptions which were neither
examined nor cross-checked by confronting the parties to the
transactions. Placing reliance solely on this report, the Respondent
No.1 Bank proceeded to declare the Petitioner as Wilful Defaulter. It
is the grievance of the Petitioner that he was not given an opportunity
of a meaningful hearing since the documents underlying the TAR were
inaccessible to him thereby compelling him to approach this Court by
filing the present petition.
5) Mr. Simil Purohit, learned Senior Counsel appeared for
the Petitioner while Mr. Prakash Shinde, learned counsel appeared for
the Respondent No.1-Bank. Mr. Mohamedali Chunawala, learned
counsel represented the Respondent No.2. We have heard counsels for
all the parties and perused the documents with their assistance.
6) Mr. Purohit took us through the correspondence between
the parties in detail. He pointed out the show-cause notice dated 5th
Shivgan 4/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
April 2023 issued to him and his brother and co-director, Mr. Ajay
under the Master Circular on Wilful Defaulters dated 1st July 2015
issued by the RBI. According to him, the show-cause notice merely
reproduced an extract from the TAR, which reflected the opinion of
the auditor without any supporting documents. The Petitioner then
addressed an e-mail dated 22nd April 2023 to the Respondent No.1
conveying that since BSIL was under a new management, the
Petitioner did not have access to previous information and data. He
sought time to reply to the SCN.
7) Petitioner again by e-mail dated 25th May 2023 sought
more time to respond as the earlier staff and CA of BSIL were not
available to provide data to him. The WDC without waiting for his
reply to the SCN nor providing a personal hearing, passed an order
dated 14th September 2023 declaring the Petitioner and the co-
director as ‘Wilful Defaulter’. By e-mail dated 17th October 2023, the
Petitioner once again requested the Respondent No.1 to provide him
copies of all the documents/materials on the basis of which the SCN
was issued to him by the WDC. According to Mr. Purohit, there was
no response to the said e-mail. The Petitioner thus, issued a response
dated 28th October 2023 to the SCN without the benefit of
Shivgan 5/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
supporting documents.
8) Mr. Purohit submits that the Petitioner sought the
supporting documents on multiple occasions, but the Respondent
No.1 failed to furnish the same apart from an extract of the TAR
provided by e-mail dated 2nd November 2023. The Petitioner, by e-
mail dated 20th November 2023 conveyed his objection that the TAR
only reflects the opinion of the auditor and does not contain an
independent analysis by the Respondents in arriving at the decision to
declare the Petitioner as ‘Wilful Defaulter’. He reiterated his request
for grant of personal hearing, which was eventually granted on 28th
February 2024. This hearing, according to him was not a meaningful
representation without access to the supporting documents. The
Petitioner tried to get the required information from the erstwhile CA
of BSIL namely, Mr. Nilamadhab Mishra, who was also unable to
provide the same.
9) Thereafter, the order dated 13th June 2024 was issued by
the WDC recording its findings that the Petitioner and his brother
have committed wilful default as per RBI’s Master Circular and are fit
to be declared as ‘Wilful Defaulters’. The WDC recommended that its
Shivgan 6/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
decision be submitted to WDRC for confirmation. By order dated
25th October 2024, the WDRC confirmed the order of the WDC,
which was communicated to the Petitioner on the same day. The
Petitioner addressed an e-mail dated 11th November 2024 to the RP
seeking access to old documents of the company, however, the RP by
e-mail dated 12th November 2024 indicated his inability as the new
management had taken over the company and the RP stood
discharged. The Petitioner by e-mail dated 27th November 2024 even
reached out to the new management seeking inspection of old
documents, which went unanswered.
10) Mr. Simil Purohit contended that the orders impugned
herein are passed without application of mind and in complete
disregard of the principles of natural justice. He says that the
Respondent No.1 had an obligation to provide access to the material
based on which the Petitioner was declared to be a ‘Wilful Defaulter’.
Most importantly, he points to the NCLT order dated 10th March
2021, which held the TAR to be inconclusive. He asserts that the
allegations in the SCN were based on documents leading to the TAR.
The Respondent No.1 is under a statutory obligation to share the said
documents without which the Petitioner cannot be expected to
Shivgan 7/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
meaningfully defend himself. He thus says that the entire action of the
Respondent No.1 is in contravention of the RBI’ Master Circular and
urges the Court to quash the orders impugned in the Petition.
11) Mr. Purohit placed reliance on the following judgments:
(a) Milind Patel v. Union Bank of India & Ors.1
(b) State Bank of India v. Jah Developers Pvt. Ltd. &
Ors.2
(c) Kotak Mahindra Bank v. Hindustan National Glass
& Ind. Ltd.3
(d) Hindustan National Glass Ind. Ltd. v. Reserve Bank
of India4
(f) State Bank of India & Ors. v. Rajesh Agarwal &
Ors.6
12) Per contra, Mr. Prakash Shinde raised a preliminary
1 2024 SCC Online Bom 745
2 (2019) 6 SCC 787
3 (2013) 7 SCC 369
4 2009 SCC Online Cal 2112
5 2024 SCC Online Cal 4978
6 (2023) 6 SCC 1Shivgan 8/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.docobjection as to the maintainability of the Petition on the ground that
the Respondent No.1 is not ‘State’ nor an instrumentality of the State
within the meaning of Article 12 of the Constitution of India. The
Respondent No.1 is now a private sector bank for regulatory purpose
with effect from 21st January 2019. Thus, the present Petition under
Article 226 of the Constitution of India is not maintainable.
13) On the merits of the matter, Mr. Shinde says that the
suspended directors, including the Petitioner herein were consulted by
the RP during the process of preparation of the TAR and were also
given sufficient opportunity by the auditors to provide clarifications
on their observations on the TAR. Despite repeated requests and
reminders, the Petitioner did not offer any clarification. Thus, the RP
filed fresh Applications before the NCLT under the provisions of
Section 43, 44, 66 and 69 of the IBC and the same are pending before
the adjudicating authority. Admittedly, now the company is under the
control of the new management pursuant to the approval of the
NCLT.
14) Mr. Shinde also reiterates the correspondence between the
parties to contend that several opportunities were given to the
Shivgan 9/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
Petitioner and his brother to represent themselves but they continued
to seek time, which according to him was nothing but delay tactics
employed by them. He further stated that relevant extracts of the TAR
were provided to the Petitioner vide E-mail dated 2nd November
2023 and the entire TAR was readily available with the Petitioner as
the same was served to him by the RP alongwith the IA/122/2022 filed
before the NCLT. Pursuant to this the Petitioner has also responded to
the SCN and this indicates that the Petitioner availed of the
opportunity despite his purported grievance of not having access to
documents. Mr. Shinde states that the Petitioner was given a personal
hearing and has also filed his written representation before the
WDRC. It is only after considering all the
documents/replies/representations and overall conspectus of the
matter that the WDRC passed the detail order dated 16th September
2024 confirming the findings of the WDC and the Petitioner was
declared as Wilful Defaulter by Order dated 25th October 2024 which
is impugned in the present petition. Mr. Shinde thus affirms that there
is no procedural infirmity in the procedure adopted by the
Respondent No.1, and it has complied with all the requirements set
out in the Master Circular as well as the directions of the Apex Court
Shivgan 10/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
in its various decisions. He thus urges us to dismiss the petition. He
placed reliance on the following decisions of the Supreme Court and
this Court:
A) Mrinmayee Rohit Umrotkar v. Union of India & Ors. 7
B) Jah Developers (Supra)
15) Before proceeding to render an analysis in the facts of the
case, it is essential to examine the scheme of the Master Circular. In
order to put in place a system to disseminate credit information
pertaining to wilful defaulters for cautioning banks and financial
institutions so as to ensure that further bank finance is not made
available to them, the RBI, in exercise of power under Sections 21 and
35A of the Banking Regulation Act, 1949 issued Master Circular dated
1.7.2015. Clause 2.1.3 defines the term ‘Wilful Default’. It reads as
thus:
“2.1.3 Wilful Default: A ‘wilful default’ would be deemed to
have occurred if any of the following events is noted:-
(a) The unit has defaulted in meeting its payment /
repayment obligations to the lender even when it has the
capacity to honour the said obligations.
7 2021(4) Mh.L.J.
Shivgan 11/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
(b) The unit has defaulted in meeting its payment /
repayment obligations to the lender and has not utilised the
finance from the lender for the specific purposes for which
finance was availed of but has diverted the funds for other
purposes.
(c) The unit has defaulted in meeting its payment /
repayment obligations to the lender and has siphoned off
the funds so that the funds have not been utilised for the
specific purpose for which finance was availed of, nor are
the funds available with the unit in the form of other assets.
(d) The unit has defaulted in meeting its payment /
repayment obligations to the lender and has also disposed
off or removed the movable fixed assets or immovable
property given by him or it for the purpose of securing a
term loan without the knowledge of the bank/lender.”
16) Clause 2.5 of the Master Circular provides for initiation of
penal measures against the persons or entities declared as wilful
defaulter under Clause 2.1.3 of the Master Circular, which includes
non-grant of additional loan facility by any bank or financial
institution in the future; debarring them from floating new venture for
a period of five years from the date of removal of name as wilful
defaulter; initiation of criminal proceedings; change of management of
borrower unit; non-induction of the person in the Board of the
company etc. The last part of Clause 2.5 places a specific obligation
Shivgan 12/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
on the banks to put in place a transparent mechanism so that the penal
provisions of the said clause are not misused and the scope of such
discretionary exercise of power is kept to a bare minimum. Solitary or
isolated incidents are not to be used for the use of penal action under
the said clause. Clause 2.5 reads as under:
“2.5 Penal measures
In order to prevent the access to the capital markets by the
wilful defaulters, a copy of the list of wilful defaulters (non-suit
filed accounts) and list of wilful defaulters (suit filed accounts)
are forwarded to SEBI by RBI and Credit Information Bureau
(India) Ltd. (CIBIL) respectively.
The following measures should be initiated by the banks and FIs
against the wilful defaulters identified as per the definition
indicated at paragraph 2.1 above:
a) No additional facilities should be granted by any bank /
FI to the listed wilful defaulters. In addition, the
entrepreneurs / promoters of companies where banks / FIs
have identified siphoning / diversion of funds,
misrepresentation, falsification of accounts and fraudulent
transactions should be debarred from institutional finance
from the scheduled commercial banks, Development
Financial Institutions, Government owned NBFCs,
investment institutions etc. for floating new ventures for a
period of 5 years from the date the name of the wilfulShivgan 13/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.docdefaulter is published in the list of wilful defaulters by the
RBI.
b) The legal process, wherever warranted, against the
borrowers / guarantors and foreclosure of recovery of dues
should be initiated expeditiously. The lenders may initiate
criminal proceedings against wilful defaulters, wherever
necessary.
c) Wherever possible, the banks and FIs should adopt a
proactive approach for a change of management of the
wilfully defaulting borrower unit.
d) A covenant in the loan agreements with the companies in
which the banks/FIs have significant stake, should be
incorporated by the banks/FIs to the effect that the
borrowing company should not induct on its board a person
whose name appears in the list of Wilful Defaulters and that
in case, such a person is found to be on its board, it would
take expeditious and effective steps for removal of the
person from its board. It would be imperative on the part of
the banks and FIs to put in place a transparent mechanism
for the entire process so that the penal provisions are not
misused and the scope of such discretionary powers are kept
to the barest minimum. It should also be ensured that a
solitary or isolated instance is not made the basis for
imposing the penal action.”
17) Clause 2.9 provides that the RBI under the Credit
Information Companies (Regulations) Act, 2015 has granted
Shivgan 14/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doccertificate to four Credit Information Companies. The lender banks
should submit a list of wilful defaulters to such Credit Information
Companies. This would make the list of wilful defaulters available to
banks and financial institutions on real time basis and dissuade them
from grant of credit facility to such persons and entities.
18) Clause 3 of the Circular lays down the mechanism for
Identification of Wilful Defaulter, the relevant extract of which reads
as thus:
“3. Mechanism for identification of Wilful Defaulters
(a) The evidence of wilful default on the part of the borrowing
company and its promoter/whole-time director at the relevant
time should be examined by a Committee headed by an
Executive Director and consisting of two other senior officers of
the rank of GM/DGM.
(b) If the Committee concludes that an event of wilful default
has occurred, it shall issue a Show Cause Notice to the
concerned borrower and the promoter/whole-time director and
call for their submissions and after considering their submissions
issue an order recording the fact of wilful default and the
reasons for the same. An opportunity should be given to the
borrower and the promoter/whole-time director for a personal
hearing if the Committee feels such an opportunity is necessary.
(c) The Order of the Committee should be reviewed by another
Shivgan 15/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.docCommittee headed by the Chairman / CEO and MD and
consisting, in addition, of two independent directors of the
Bank and the Order shall become final only after it is confirmed
by the said Review Committee. However, if the Identification
Committee does not pass an Order declaring a borrower as a
Wilful defaulter, then the Review Committee need not be set up
to review such decision.
(d) As regard a non-promoter/non-whole time director, it should
be kept in mind that Section 2(60) of the Companies Act, 2013
defines an officer who is in default to mean only the following
categories of directors:
(i) Whole-time director
(ii) 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;
(iii) 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 and who has not objected to
the same, or where such contravention had taken place with
his consent or connivance.
Therefore, except in very rare cases, a non-whole time
director should not be considered as a wilful defaulter unless
it is conclusively established that
Shivgan 16/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
I. he was aware of the fact of wilful default by the borrower
by virtue of any proceedings recorded in the Minutes of the
Board or a Committee of the Board and has not recorded his
objection to the same in the Minutes, or,
II. the wilful default had taken place with his consent or
connivance.
A similar process as detailed in sub paras (a) to (c) above
should be followed when identifying a non-promoter/non-
whole time director as a wilful defaulter.”
19) As discussed earlier, the object of the Master Circular is
salutary. The Master Circular aims to protect the country’s banks and
financial institutions from unscrupulous entities and individuals. It is
intended to identify and punish those entities and individuals who
have diverted or siphoned off borrowed funds for purposes other than
for which the loan facility was availed leading to default in the
repayment obligations. Such individuals and entities must be identified
and their names be published in public domain so that they are barred
from availing any further loan facility from any other bank. If such an
exercise is not undertaken, the cycle of diversion/siphoning of
borrowed funds; default and re- borrowing, leading to same situation
may continue. Such a scenario may adversely affect the liquidity of the
banking system and affect the overall financial health of the country.
Shivgan 17/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
There is, thus, no doubt that the Master Circular aims to achieve a
very laudable object. Notably, the scheme of the Master Circular
indicates that it is both a punitive and preventive measure.
20) However, it needs to be acknowledged that the
consequences for an individual or an entity who is declared as wilful
defaulter are also drastic. As discussed earlier, such an individual or
entity is barred from availing any loan facility in the future; is
proscribed from floating new venture; and may face criminal
proceedings. Additionally, being labelled as wilful defaulter in public
domain also affects the reputation of such individual and entity.
Business entities would hesitate to do any business or dealing with
someone who is declared as wilful defaulter. The availability of loans
from financial institutions is the backbone of doing business. It is not
only a mode of raising finance but it is also an indicator of the
creditworthiness of the business entity. Hence, the deprivation to avail
such facility virtually knocks a financial death knell on such individual
or entity.
21) The Supreme Court in the case of Jah Developers (Supra),
had an occasion to examine the consequences of a person being
Shivgan 18/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
declared as wilful defaulter under the Master Circular. The Supreme
Court held that a person declared as wilful defaulter affects the
fundamental right of a person under Article 19(1)(g) of the
Constitution as it directly affects the right to do business and thus, the
Master Circular must be construed reasonably. The relevant paragraph
of the said decision reads as under:-
“24. Given the above conspectus of case law, we are of the view
that there is no right to be represented by a lawyer in the in-
house proceedings contained in Para 3 of the Revised Circular
dated 1-7- 2015, as it is clear that the events of wilful default as
mentioned in Para 2.1.3 would only relate to the individual facts
of each case. What has typically to be discovered is whether a
unit has defaulted in making its payment obligations even when
it has the capacity to honour the said obligations; or that it has
borrowed funds which are diverted for other purposes, or
siphoned off funds so that the funds have not been utilised for
the specific purpose for which the finance was made available.
Whether a default is intentional, deliberate, and calculated is
again a question of fact which the lender may put to the
borrower in a show-cause notice to elicit the borrower’s
submissions on the same. However, we are of the view that
Article 19(1)(g) is attracted in the facts of the present case as the
moment a person is declared to be a wilful defaulter, the impact
on its fundamental right to carry on business is direct and
immediate. This is for the reason that no additional facilities canShivgan 19/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.docbe granted by any bank/financial institutions, and
entrepreneurs/promoters would be barred from institutional
finance for five years. Banks/financial institutions can even
change the management of the wilful defaulter, and a
promoter/director of a wilful defaulter cannot be made
promoter or director of any other borrower company. Equally,
under Section 29-A of the Insolvency and Bankruptcy Code,
2016, a wilful defaulter cannot even apply to be a resolution
applicant. Given these drastic consequences, it is clear that the
Revised Circular, being in public interest, must be construed
reasonably. This being so, and given the fact that Para 3 of the
Master Circular dated 1-7-2013 permitted the borrower to
make a representation within 15 days of the preliminary
decision of the First Committee, we are of the view that first
and foremost, the Committee comprising of the Executive
Director and two other senior officials, being the First
Committee, after following Para 3(b) of the Revised Circular
dated 1-7-2015, must give its order to the borrower as soon as it
is made. The borrower can then represent against such order
within a period of 15 days to the Review Committee. Such
written representation can be a full representation on facts and
law (if any). The Review Committee must then pass a reasoned
order on such representation which must then be served on the
borrower. Given the fact that the earlier Master Circular dated
1-7-2013 itself considered such steps to be reasonable, we
incorporate all these steps into the Revised Circular dated 1-7-
2015…..”
22) Subsequently, in the case of Rajesh Agarwal (Supra), the
Shivgan 20/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
Supreme Court dealt with another similar Circular issued by the RBI
known as the Master Directions on Frauds. The said Circular deals
with the mechanism to declare an account as fraud. The Supreme
Court held that such classifications entail serious civil consequences
for the borrower. The proceedings forming an opinion about
classification as fraud are “administrative” in nature and the principles
of natural justice apply to the administrative decision making. It was
held that there are both civil as well as penal consequences. Such
consequences in the Master Directions on Frauds are similar to the
consequences envisaged in the Master Circular and hence the
observations made by the Supreme Court in Jah Developers (Supra)
squarely applied. It was further held that the bar from raising finances
could be fatal for the borrower leading to its “civil death” in addition
to the infraction of their rights under Article 19(1)(g) of the
Constitution. It was further held that classifying an account as fraud
not only affects the business and goodwill of the borrower, but also
the right to reputation.
23) Thus, classification of a borrower’s account as fraud has
the effect of preventing the borrower from accessing institutional
finance for the purpose of business. It also entails significant civil
Shivgan 21/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
consequences as it jeopardises the future of the business of the
borrower. Therefore, the principles of natural justice necessitate giving
an opportunity of a hearing before debarring the borrower from
accessing institutional finance. The action of classifying an account as
‘wilful’ or ‘fraud’ not only affects the business and goodwill of the
borrower, but also the right to reputation. A decision taken by any
authority affecting the right to reputation of an individual has civil
consequences. Therefore, in such situations the principles of natural
justice would come into play. Any order or decision of the authority
adversely affecting the personal reputation of an individual must be
taken after following the principles of natural justice. In case any
authority in discharge of its duties fastened upon it under the law,
travels into the realm of personal reputation adversely affecting him, it
must provide a chance to him to have his say in the matter. In such
circumstances, right of an individual to have the safeguard of the
principles of natural justice before being adversely commented upon is
statutorily recognised and violation of the same will have to bear the
scrutiny of judicial review.
24) From the aforesaid enunciation of law, it is evident that
the graver the consequences of such civil action, the higher is the
Shivgan 22/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
degree of proof required. If this principle of law is tested on the anvil
of the Master Circular, it is clear that the Master Circular entails not
only grave civil, but also penal consequences. Considering the subject
matter and grave civil and penal consequences, the validity of an order
declaring as wilful defaulter would require a closer scrutiny as to
whether such an order falls within the four corners of the procedural
mechanism prescribed in Master Circular or is it otherwise.
25) The SCN dated 5th April 2023 records that the WDC
examined the conduct of the account and utilization of credit facilities
by BSIL and concluded that the acts/events of wilful default as detailed
in the table in the SCN are committed by the Petitioner and his
brother. The table containing the details is reproduced herein under:
Criteria No. 2.1.3 (b) [2.2.1 (c)]
Criteria for Wilful Default Diversion of funds:
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.
The term ‘diversion of funds’ referred at
paragraph 2.1.3(b) above, should be
construed to cinclue transferring borrowed
funds to the subsidiaries / Group
companies or other corporates by
whatever modalities.
Position of Borrower BSIL had receivables of Rs.74.50 crore as
Shivgan 23/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc(as per Transaction Review Report on 31.03.2016 from Shri Durga Trade
Links Pvt. Ltd. (SDTL) arising out of the
dated March 5, 2020 by following transactions:
M/s G D Apte & Co.)
Particulars Amount
(Rs.Cr)
Amount due as on 4.22
01.04.2015)
Amount receivable on 33.94
account of purchase/sale
transactions
Receivable by BSIL from 15.02
related parties transferred
to SDTL
Receivable by BSIL from 21.07.
other parties transferred
to SDTL
Other entries 0.15
Total 74.50
The receivable from SDTL was reduced to
Rs.74.27 crore from 01.04.2016 to
31.03.2019 mainly on account of funds
received. No significant transactions were
carried out between these parties after
31.03.2016. Receivables of BSIL from
related/other parties were transferred to
SDTI, even though there were amount due
from SDTL to BSIL in their direct trading
transactions. In Audited Financial
Statements for FY2018-19, BSIL made
provision of doubtful debts of Rs.75.30
crore including Rs.74.27 crore due from
SDTL.
BSIL/promoters/directors were enquired
on existence of any disputes with SDTL
and also between SDTL & its respective
customers due to which these dues were
not paid by the parties or other reasons for
non-payment due to which these dues
were provided for in the Financial
Statements. However, no information was
furnished in these respect by
Shivgan 24/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
company/promoters/directors.
BSIL/Promoters did not inform whether it
has taken any tangible efforts for recovery
of these receivables from SDTL and also
whether any legal actions for recovery of
dues is envisaged even though BSIL &
SDTL are owned and controlled by
common members of Bhuwalka family viz.
Shri Ajay Bhuwalka and Shri Ankit
Bhuwalka are directors/shareholders in
BSIL and SDTL. Receivables were
transferred to SDTL even though BSIL, in
its direct trading transactions with SDTL,
had to receive substantial amounts from
SDTL. The transactions between BSIL &
SDTL does not appear to be transactions
in ordinary in course of business.
In view of the above, it can be concluded
that BSIL has diverted an amount of
Rs.74.27 crore through SDTL which
would have been otherwise available for
payment to lenders. Thus, these
transactions with SDTL amounts to
Diversion of funds as per RBI Circular
(RBI/2015-16/100 dated July 1, 2015) on
“Wilful Defaulter”.
26) It is thus clear from the table that the position of the
Borrower as relied upon by the WDC is as per the Transaction Review
Report dated 5th March 2020 prepared by the auditor M.s G.D Apte
&Co. At the cost of repetition, it is necessary to note that the RP had
made an application before the NCLT bearing IA No. 133/2020 u/s 60
r/w 66 of the IBC. By its Order dated 10th March 2021, the NCLT
Shivgan 25/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
disposed the application holding that the same was premature and
directed the RP to carry out basic enquiry of all surrounding facts to
make out his case, make enquiries from all concerned parties with
reference to the transactions highlighted in the forensic report, and
arrive at some definite conclusion before referring the matter to the
Tribunal u/s 66 of the Code. NCLT has also observed that the forensic
Report prepared by the Auditors simply assumes the transactions to be
fraudulent and the conclusions that funds were siphoned away were
reached in a summary manner. We specifically enquired with both the
counsels as to whether the Forensic Report commented upon by the
NCLT was the same as the TAR referred to in the SCN. We were
assured by both the counsels that it was the same report. It is thus safe
to accept that the basis of issuance of the SCN was primarily the
findings in the TAR, which were observed by the NCLT to be mere
assumptions. Considering the grave consequences that follow a finding
by the WDC, the degree of proof required and expected to have been
relied upon by the WDC should be much higher and not simply based
on a TAR which itself was unacceptable to the NCLT.
27) Let us now examine the second aspect in the matter. The
Petitioner via emails dated 22nd April 2023 and 25th May 2023
Shivgan 26/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
sought time to respond to the SCN specifically stating that he had no
access to the documents underlying the TAR which was relied upon by
the WDC and sought copies of the same. Neither providing the
required documents nor replying to the request made by the
petitioner, the WDC proceeded to take a decision dated 14th
September 2023 to declare the Petitioner as wilful defaulter. The
decision was communicated to the Petitioner by letter dated 27th
September 2023 and was further called upon to avail a final
opportunity to submit any further representation. By email dated 17th
October 2023, the Petitioner once again requested for documents but
there was no reply. Ultimately he sent a response to the SCN albeit
without the benefit or assistance of any documents on the basis of
which he was required to explain the findings in the TAR by email
dated 28th October 2023. It appears that by email dated 2nd
November 2023 the Respondent No.1 sent an extract of the TAR,
which obviously was of no assistance to the Petitioner since the
statement of accounts and other documents which formed the basis of
the TAR were not provided to him. We are quite perplexed to
comprehend the reluctance of the Respondent No.1 to share the
documents with the Petitioner. It is most unreasonable to expect the
Shivgan 27/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
Petitioner to tender a reasonable clarification/explanation to the TAR
and consequently the SCN without having access to the relevant facts
and figures. We thus find merit in the Petitioner’s submission that the
extract of the TAR does not reflect any independent analysis made by
the Respondent No.1 as it was already circumspect in the NCLT order
of 10th March 2021. The SCN based only on the TAR is consequently
exceptionable.
28) On 28th February 2024, a personal hearing was given to
the Petitioner. Admittedly, even during the personal hearing the
Petitioner expressed his grievance regarding lack of access to the
records. Pursuant to the personal hearing, WDC decided that the
Petitioner was fit to be declared as wilful defaulter by its Order dated
13th June 2024. Vide the same order, the WDC recommended to the
WDRC to confirm the same. A perusal of the Order dated 13th June
2024 reveals that admittedly the Petitioner sought transaction level
details to respond to allegations based on the TAR and the WDC told
him that for replying to the allegations, the Petitioner and his brother
can check the records of the group company of BSIL namely STDL as
they themselves were its shareholders. From this it is clear that despite
repeated requests made by the Petitioner to supply documents, the
Shivgan 28/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
only answer of the committee was that since the Petitioner was a
shareholder in STDL, he must make efforts to procure the documents
from STDL. Even Mr. Shinde in his arguments reiterated the
justification that since the Petitioner was privy to the proceedings
before the NCLT and the TAR was prepared with the Balance sheets
and accounts statements of the BSIL, he is presumed to have the
necessary information. It is pertinent to note that the proceedings
before the NCLT pertaining to Corporate Debtor BSIL are quite
distinct from the proceedings to declare Petitioner albeit a suspended
director of BSIL, as wilful defaulter and the Petitioner is proceeded
against in his individual capacity. Even if the Petitioner is presumed to
have access to documents in the proceedings before the NCLT, he is
justified in seeking documents in the conduct of WDC proceedings. It
is not for the WDC to shrug away its responsibility under the pretext
of such presumptions and assumptions. The statutory procedural
mechanism laid down in the Master Circular, interpreted in various
decisions of the Supreme Court must be followed by the Respondent
No.1 and its committees in letter and spirit. We thus, have no
hesitation in agreeing with the Petitioner that the personal hearing
cannot be construed to be meaningful with the Petitioner having his
Shivgan 29/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
hands tied behind in the context of the Respondent No.1 withholding
the necessary documents and expecting to offer his comments.
29) In the case of Milind Patel (Supra) this court held that not
only must information that is referred to and relied upon in the SCN
be supplied but also information that may undermine the allegations
contained in the SCN must be supplied only to ensure that everything
relevant to arrive at the truth is available to both the parties. The
objective of the proceedings initiated by issuance of a SCN is not to
somehow find the noticee guilty of wilful default on the terms as
alleged. Instead the objective is to arrive at the truth as to whether or
not an individual in question is to subjected to ‘penal’ consequences.
Mr. Shinde also placed reliance on the decision of the Apex Court in
Jah developers (Supra) but the said decision in fact holds otherwise
than his submission and does not assist him any. In any case, we have
already discussed the said decision herein above.
30) We now deal with the issue regarding maintainability of
the present petition against the Respondent No.1-Bank which Mr.
Shinde urges is not ‘State’ and hence not amenable to writ jurisdiction.
We have already discussed the decision of the Supreme Court in the
Shivgan 30/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
matter of Jah Developers (Supra). The Supreme Court clearly
expressed its view that Article 19(1)(g) of the Constitution of India is
attracted as the moment a person is declared as wilful defaulter there
is a direct and immediate impact on his fundamental right to carry on
business. It is settled law that a Fundamental right under Article 19 or
21 can be enforced even against persons other than State or its
instrumentalities. In a recent decision a majority of a five-judge bench
of the Supreme Court in the matter of Kaushal Kishore vs State of
Uttar Pradesh and Others8 held that a fundamental right can be
enforced even against a non-state actor. Justice Ramasubramanian (as
he then was) writing for the majority wrote, “The original thinking
that these rights can be enforced only against the state, changed over a
period of time. The transformation was from ‘state’ to ‘authorities’ to
‘instrumentalities of state’ to ‘agency of the government’ to
‘impregnation with governmental character’ to ‘enjoyment of
monopoly status conferred by state’ to ‘deep and pervasive control’ to
the ‘nature of the duties/functions performed.” In this connection, he
also quoted Justice Vivian Bose’s famous words in S. Krishnan v. State
of Madras9, about not placing undue importance on petty linguistic
8 (2023) 4 SCC 1
9 AIR 1951 SC 301
Shivgan 31/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
details, and ‘penetrating deep into the heart and spirit of the
Constitution’. On the strength of this prescription, Justice
Ramasubramanian ( as he then was) proceeded to answer the question
whether a fundamental right under Articles 19 or 21 could be claimed
other than against the state or its instrumentalities, in the affirmative.
In this view of the matter, we have no hesitation in holding the present
petition to be maintainable against the present Respondent No.1. We
have also perused the decision of this Court in Mrinmayee (Supra)
relied upon by the Respondent No.1 but the same is in a different
context and hence does not assist the Respondent No.1.
31) In view of the aforesaid discussion, we are inclined to
quash and set aside the Show Cause Notice dated 5th April 2023
issued by the Respondent No.1-Bank; order dated 14th September
2023 issued by the Wilful Defaulter Committee of the Respondent
No.1-Bank; Order dated 13th June 2024 issued by the Wilful Default
Committee and Order dated 25th October 2024 passed by the Wilful
Defaulter Review Committee qua the Petitioner only.
32) It is made clear that we have not gone into the merits of
the matter and have limited our finding to the procedural infirmities
Shivgan 32/33
::: Uploaded on – 17/01/2025 ::: Downloaded on – 18/01/2025 09:04:06 :::
901-WP-12-2025-J-.doc
committed by the Respondent No.1 Bank. Hence, we grant liberty to
the Respondent No.1 Bank to initiate any action against the Petitioner
herein, as it may be advised. The Bank is at liberty to issue fresh show
cause notice to the Petitioner by making proper disclosure of material
and information on which the show cause notice may be based. We
further make it clear that by this judgment, we are not foreclosing a
fair and effective determination of the issue by the Respondent No.1
Bank, but it would be required to comply with the due process of law
for the time being in force and adhere to the principles of natural
justice.
33) Needless to state that all/any consequential action taken
pursuant to the impugned order are also quashed and set aside.
34) The Petition is allowed accordingly. Rule is made absolute.
35) There shall be no order as to costs.
36) All parties to act on an authenticated copy of this
Judgment.
(DR. NEELA GOKHALE, J.) (REVATI MOHITE DERE, J.)
Digitally
signed by
SHAMBHAVI
SHAMBHAVI NILESH
NILESH SHIVGAN
SHIVGAN Date:
2025.01.17
15:45:44
+0530
Shivgan 33/33
::: Uploaded on - 17/01/2025 ::: Downloaded on - 18/01/2025 09:04:06 :::