Banks must comply with requirements of natural justice as embodied in RBI Master Circular, before declaring willful defaulter: Delhi HC

Read Judgment: FROST INTERNATIONAL LTD vs. BANK OF BARODA

Pankaj Bajpai

New Delhi, September 16, 2021: The Delhi High Court has ruled that Bank’s decision to declare borrower as willful defaulter merits to be quashed if it fails to follow procedure as per RBI’s Master Circular dated July 1, 2015.

A Single Bench of Justice Prateek Jalan therefore set aside the proceedings of Identification Committee and Review Committee culminating in communications dated October 5, 2019 and June 11, 2020 observing that the procedure adopted by the Bank fell short of requirements of natural justice as embodied in Master Circular.

Going by the background of the case, the respondent bank had issued show cause notice to the petitioners, enumerating grounds upon which it intended to classify them as willful defaulters.

Eventually, banks’ Identification Committee considered petitioners’ case at its meeting and a meeting of consortium of lenders was thereafter held, at which it was decided that report of Forensic Auditor M/s Haribhakti & Co. should be taken into cognizance. On this basis, Identification Committee declared Petitioners as willful defaulters.

Petitioners’ express contention was that a copy of minutes dated September 16, 2019 was not served upon them. They were instead served with a communication dated October 05, 2019, which set out the decision and granted 15 days’ time to them to file a representation for consideration of Review Committee.

Petitioners therefore filed present petition to assail communication dated Octber 05, 2019 by which Bank’s decision to declare them as willful defaulters under RBI’s Master Circular was communicated to them and communication dated June 11, 2020 by which Review Committee’s decision under the Master Circular was communicated to them.

After considering the submissions, Justice Jalan stated that requirements of natural justice had been read into the Master Circular in view of drastic consequences, which declaration as a willful defaulter visited upon borrower.

Requirements of Master Circular were that show cause notice must be issued, response of borrower must be considered by Identification Committee and reasoned order must be passed, added Justice Jalan.

The Single Bench further said that the borrower must be given opportunity to make representation before Review Committee, which must be considered and reasoned order be passed and served upon the borrower.

In the present case, minutes of meeting of Identification Committee dated September 16, 2019 demonstrated that at stage of personal hearing, Committee decided to defer the matter. Whereas, the final decision was thereafter taken based upon meeting of consortium, which decided to accept M/s. Haribhakti & Co’s report, noted the Bench.

The High Court therefore observed that no further opportunity of hearing was given to the petitioners and the Identification Committee’s decision was unreasoned, except to record conclusion of consortium. Moreover, in Review Committee’s meeting, only ground for rejecting petitioners’ representations was consortium’s decision.

Hence, opining that the procedure adopted by the bank fell short of requirements of natural justice as embodied in Master Circular, the High Court noted that the Identification Committee proceeded on basis of consortium meeting held after personal hearing was granted to petitioners, without any further opportunity of making representation or hearing.

Since the minutes of meeting of Identification Committee were not served upon petitioners and the communications dated October 5, 2019 and June 11, 2020 did not spell out in sufficient detail reasons for which Identification and Review Committees had rejected the representations, the High Court allowed the petition.