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Gujarat High Court Denies Protection: Petitioner's Bid to Escape Wilful Defaulter Tag Rejected

Introduction:

The Gujarat High Court recently rendered a noteworthy judgment in the case of Jagdish Prasad Saboo vs IDBI Bank Limited. This significant court ruling offers a comprehensive analysis of the court's decision, encompassing the factual background of the case, the court’s ruling, and a critical analysis leading to the conclusion.


Brief Facts:

Jagdish Prasad Saboo served as the Director of Surya Exim Ltd., a trading company. However, due to the non-realization of trade receivables, the company's account transitioned into a Non-Performing Asset (NPA). Consequently, consortium member banks, including IDBI Bank, declared it as an NPA. A forensic audit was conducted, and Jagdish Prasad Saboo was issued a show-cause notice in relation to the declaration as a wilful defaulter. The Wilful Defaulter Identification Committee ('WDIC') and the Wilful Defaulter Review Committee ('WDRC') subsequently affirmed the declaration. The petitioner, Jagdish Prasad Saboo, has challenged the order of the WDIC and WDRC regarding his classification as a wilful defaulter.

  • The petitioner asserts that the Forensic Audit Report (FAR) issued on 08.07.2020, conducted by SKVM & Co, was not provided to him, and thus the proceedings violated the principles of natural justice.

  • Additionally, the petitioner seeks protection under the interim moratorium granted under Section 96 of the Insolvency and Bankruptcy Code ('IBC') in an application filed by Tata Capital Finance Service Ltd. and approved by the NCLT, Ahmedabad. The petitioner argues that as the interim moratorium has been granted, no proceedings related to debt recovery, either directly or indirectly, can be initiated. IDBI Bank maintains its support for the orders, contending that the petitioner had knowledge of FAR and had ample opportunities to respond. Furthermore, the bank argues that the interim moratorium does not apply to Wilful Defaulter proceedings.

Held:

The findings of the court in the case were as follows:

  • Non-Furnishing of Documents: The court examined the petitioner's claim regarding the non-furnishing of the FAR and its alleged violation of natural justice principles. The court ruled that the non-furnishing of documents did not prejudice the petitioner's defense and did not invalidate the orders. The court emphasized that the focus should be on the merits of the case rather than procedural technicalities.

  • Upholding the Classification as a Wilful Defaulter: The Gujarat High Court, led by Justice A.S. Supehia, upheld the classification of the petitioner as a wilful defaulter. The court considered the findings of the WDIC and the WDRC, which concluded that the petitioner had diverted funds without the lenders' permission. These findings aligned with the criteria outlined in the RBI master circular dated 01.07.2015, defining a wilful defaulter.

  • Scope of Interim Moratorium: The court clarified that the interim moratorium sought by the petitioner under section 96 of the IBC applies specifically to debt-related legal actions or proceedings during the moratorium period. However, the court clarified that the moratorium does not extend to proceedings related to the declaration of a borrower as a wilful defaulter. This distinction established that the moratorium provision does not impede the process of declaring the petitioner as a wilful defaulter.

  • Evaluation of Petitioner's Defence: The court clarified that the interim moratorium sought by the petitioner under Section 96 of the IBC applies specifically to debt-related legal actions or proceedings during the moratorium period. However, the court clarified that the moratorium does not extend to proceedings related to the declaration of a borrower as a wilful defaulter. This distinction established that the moratorium provision does not impede the process of declaring the petitioner as a wilful defaulter.

Overall, the court's findings emphasized the importance of substantive arguments, upheld the classification of the petitioner as a wilful defaulter based on the investigative committees' findings, and clarified the scope of the interim moratorium provision in relation to wilful default proceedings.


Conclusion:

In conclusion, the Gujarat High Court presided over by Justice A.S. Supehia, dismissed the petitioner's claim that the interim moratorium provided protection against the declaration of wilful default. The court clarified that the moratorium under Section 96 of the IBC does not extend to proceedings related to wilful default. Furthermore, the court rejected the petitioner's argument of violation of natural justice due to the non-furnishing of documents. The court emphasized that the non-supply of documents did not prejudice the petitioner's defence and did not invalidate the orders. The court's decision emphasizes the significance of the substantive aspects of the case and upholds the classification of the petitioner as a wilful defaulter based on the findings of the investigative committees.


It is worth noting that this decision contradicts the ruling of the Bombay High Court in the case of Milind Patel vs IDBI Bank Ltd, wherein the court determined that the petitioner should have access to a copy of the FAR.


Authored by Nitish Solanki, Associate at Metalegal Advocates. The views are personal and do not constitute legal opinion.



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