Introduction
In the case of* Vishambar Saran v. Central Bank of India*[i], the Hon’ble High Court of Calcutta addressed the critical issue of declaring petitioners as willful defaulters (‘WD’). This declaration was made by the WD Identification Committee (‘First Committee’) and subsequently affirmed by the Review Committee (‘RC’), both of which were challenged by the petitioners. The core dispute revolved around the reliance on the transaction audit report (‘TAR’) prepared during the corporate insolvency resolution process (‘CIRP’). Rendering the decision, the High Court underscored the importance of independent verification in preparing TAR, highlighting the necessity for caution and thoroughness in preparing and using such reports.
Brief Facts
This case involved two writ petitions that challenged decisions related to the declaration of the petitioners as WDs. One petition contested the decision of the First Committee under the RBI Master Circular on WDs, while the second petition challenged the RC’s declaration.
The First Committee’s decision was based solely on the TAR prepared by M/s Deloitte Touche Tohmatsu India, LLP, during the CIRP of the borrower company. The TAR contained disclaimers indicating that it was not conclusive, was prepared for internal use, and did not independently verify the information provided by the corporate debtor (CD).
The National Company Law Tribunal ('NCLT') had previously rejected an application by the liquidator, based solely on the TAR, to direct the respondents to make contributions. This rejection was upheld by the National Company Law Appellate Tribunal ('NCLAT'). However, the Central Bank of India, a member of the creditor consortium, continued to rely on the discredited TAR to declare the petitioners as WDs. The lead bank of the consortium, Punjab National Bank (PNB), initially considered the petitioners as WDs but later reversed this decision, aligning with the NCLT and NCLAT’s findings.
The petitioners had argued that the Central Bank’s action was legally and procedurally unsound and called upon the High Court to examine the justification and validity of the committee’s reliance on the TAR for the WD declarations. The petitioners further contended that the basis for their declaration as WDs was fundamentally flawed and that the TAR was an unreliable basis for any adverse financial or legal determinations. It was also highlighted that the RC reviewed and upheld the First Committee’s decision in a mechanically conducted meeting that clubbed together multiple entities without detailed considerations.
Held
While quashing the declarations of the petitioners as WDs by the First Committee and the RC, the High Court observed that the TAR, which the liquidator had commissioned, included multiple disclaimers about its inconclusive nature and lack of independent verification. The High Court emphasised that the TAR itself cautioned against its use as a definitive basis for any action without independent corroboration.
The High Court also noted that both tribunals discredited the TAR, finding it to lack substantiated evidence. Consequently, the High Court observed that the decision of the First Committee and the RC to declare the petitioners as WDs was procedurally and legally unsound. Relying on the discredited TAR was deemed a breach of due process and principles of natural justice as it expressly stated that it was for external use and lacked independent verification of the information.
Subsequently, the High Court addressed the actions of the Central Bank of India, which continued to rely on the discredited TAR, stating that the bank was bound by the decision of the tribunals. The High Court pointed out the inconsistency in the Central Bank of India’s position, especially since the lead bank of the consortium had also reversed its stance. It was held that the RC failed to provide a reasoned order, as required by the Supreme Court’s guidelines in the State Bank of India v. Jah Developers (P) Ltd.[ii]* *case.
Our Analysis
The recent High Court decision clearly conveys that reliance on discredited reports, such as the TAR in this case, is legally unsound and procedurally flawed. The High Court’s emphasis on the multiple disclaimers and the lack of independent verification in the TAR highlights the necessity for caution and thoroughness in preparing and using such reports. The decision underscores that reports prepared for internal purposes, especially those with explicit disclaimers about their inconclusive nature, should not be used as definitive bases for serious legal actions without substantial corroboration.
This case illustrates the critical need for financial institutions and committees to adhere strictly to principles of due process and natural justice, ensuring that any declarations or actions taken are based on robust and reliable evidence. This ruling serves as a pivotal reminder to all financial institutions and regulatory bodies to uphold the highest standards of legal and procedural integrity, thereby ensuring the protection of individuals' rights and maintaining the credibility of the financial and legal systems.
End Notes
[i] [2024] 164 taxmann.com 513 (Calcutta) [14-05-2024].
[ii] [2019] 6 SCC 787.
Please find below a similar case analysis where the declaration of a willful defaulter was set aside:
Transparency Upheld: Bombay HC lays down Guidelines in Wilful Default Declarations by Shivam Mishra
Authored by Siddharth Jha, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion
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