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Transparency Upheld: Bombay HC lays down Guidelines in Wilful Default Declarations

Introduction

This case, Milind Patel v. Union of India,[i] pertains to a petition filed before the Bombay High Court (‘HC’) by the director of a company challenging the process followed by the Bank in declaring him a wilful defaulter. The HC’s ruling has highlighted the importance of procedural fairness and transparency. This analysis delves into the significance of the HC’s directives in upholding principles of natural justice and ensuring transparency in administrative decisions with far-reaching implications.

Facts

  • The petitioner, a former Joint Managing Director of IL&FS Financial Services Limited (‘IFIN’), filed a writ seeking various declaratory reliefs. He sought adherence to the principles of natural justice, including the provision for inspection of relevant material, as stipulated by the Reserve Bank of India (‘RBI’) in its Master Circular on Wilful Defaulters dated 01.07.2015 (‘Master Circular’).

  • The petitioner’s role as a whole-time director of IFIN was being considered for declaration as a wilful defaulter by the Bank.

  • The Bank served a show cause notice (‘SCN’) to the petitioner and IFIN, alleging diversion and siphoning of funds by IFIN. However, the Bank failed to provide detailed material or records that formed the basis of these allegations in the SCN. Despite repeated requests from the petitioner for access to such material, the Bank did not respond adequately. The petitioner attended the personal hearing and filed detailed written submissions to the Bank but did not receive any feedback for nearly seven months.

  • Subsequently, the Bank issued a final order declaring the petitioner as a wilful defaulter. The petitioner claimed that his detailed submissions were completely overlooked before issuing this declaration was made. He also claimed that he was not served with a copy of the draft order by the Identification Committee (‘IC’) of the Bank, which was supposedly issued on the day of his personal hearing.

  • In light of these circumstances, the petitioner accused the Bank of blatant violations of the basic principles of natural justice and safeguards contained in the RBI’s Master Circular. He sought the HC’s intervention to quash the final order issued by the Review Committee (‘RC’) of the Bank and to mandate the provisions of all documents referred to in the SCN.

Held

  • The HC directed the Bank to withdraw the orders issued by its IC and RC against the petitioner. Additionally, it directed the Bank to provide the petitioner with access to all relevant material in order to enable him to effectively respond to the SCN. The HC further laid down sequential directions for the Bank to follow, ensuring that both the IC and RC issue well-reasoned orders after considering the petitioner’s submissions and in accordance with the principles of natural justice.

  • The decision followed the HC's observation that the Bank's committees had issued orders without adequate reasoning, demonstrating non-compliance with natural justice principles. The HC pointed out that the SCN, hearing notice, and final order were all signed by the same individual, which obscured the identities of those who conducted the hearing and made the decisions. The HC criticized the immediate issuance of the draft order following the personal hearing and the RC’s neglect to document or consider the petitioner’s written submissions, highlighting concerns over the Bank's transparency and procedural integrity.

  • To prevent similar issues in the future, the HC issued sequential directions for banks and financial institutions when using the Master Circular to declare wilful defaults, inter alia requiring them to disclose the members of both the IC and RC, providing all material that form the basis of the SCN and allegations, whether relied upon or not, and sharing the reasoned orders passed by these committees with the accused.

Analysis

The HC’s ruling, in this case, underscores the critical importance of procedural fairness and transparency in administrative decisions, particularly those with significant consequences, such as declaring wilful defaults, which essentially cut off the accused from the country’s financial sector. By directing the Bank to recall previous orders and restart proceedings from the SCN stage, the HC prioritized adherence to the principles of natural justice.

Furthermore, the HC’s emphasis on disclosing the members of the IC and RC, as well as sharing reasoned orders, highlights the necessity for transparency in decision-making processes. The lack of clarity regarding the composition of these committees in the present case underscores concerns about procedural integrity. In this decision, the HC also discussed the risks associated with granting serious discretionary powers to commercial entities such as banks and financial institutions, without adequate understanding of adherence to legal requirements.

Overall, this ruling reaffirms the judiciary’s commitment to upholding fundamental principles of fairness and transparency in administrative actions, ensuring that individuals subject to such actions are afforded proper opportunity to respond and defend their interests.


End Note

[i] 2024 SCC OnLine Bom 745



Authored by Shivam Mishra, Advocate at Metalegal Advocates. The views expressed are personal and do not constitute legal opinion.

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