Listen to this post
Relevant or Relied Upon? Bombay High Court Clears Air on Disclosure of Information by Banks in Wilful Defaulter Proceedings

In Mr. Milind Patel v. Union Bank of India & Ors.[1] (“Judgment”), the Division Bench of the Bombay High Court (“Court”) has inter alia held that lenders/ banks seeking to invoke the Reserve Bank of India, Master Circular on Wilful Defaulters (“Master Circular”) for declaring entities and/ or persons as wilful defaulters, must supply all relevant materials to the noticee, which includes not only incriminating material but also exculpatory material. The Court therefore clarified that a bank is obligated to provide all relevant materials and not just information ‘referred to’ and ‘relied upon’ in the show-cause notice when conducting proceedings under the Master Circular.

Facts in brief

In the present case, the petitioner, a former Joint Managing Director of IL&FS Financial Services Limited (“IFIN”) and IFIN were served with a common show-cause notice (“SCN”) by Union Bank of India (“Bank”) under the Master Circular for alleged wilful default. In response, the petitioner inter alia sought all relevant materials, on the basis which the Bank had issued the SCN. However, he was not provided with the same. Further, as per the petitioner’s case, the draft order passed by the Identification Committee too was not communicated to him. He directly received the final order passed by the Review Committee (“Impugned Order”) from the Bank, which was not a reasoned order. The Petitioner then filed a writ petition (“Petition”) before Bombay High Court seeking inter alia quashing of the Impugned Order.

Supreme Court on Master Circular

The Supreme Court in State Bank of India v. Jah Developers Private Limited and Others[2] (“Jah Developers”), had held that the moment a person is declared a wilful defaulter, the impact on its fundamental right to carry on business is direct and immediate. Recognising the need to further strengthen the due process, the Supreme Court read in additional measures into the Master Circular, importantly the borrowers’ right to make representations before the Review Committee against the Identification Committee’s draft order and the need for the Review Committee to pass a reasoned final order on such representation. Following the judgment in Jah Developers, the Bombay High Court in Kanchan Motors and Others vs. Bank of India & Ors.[3] and Narendra Seoomal Sabnani & Others Vs. State Bank of India & Others[4] had clarified that orders passed by both, the Identification Committee and the Review Committee must be reasoned and non-speaking orders by such Committees, will be frowned upon.

Regarding disclosure of materials, the Supreme Court in T. Takano Vs. Securities and Exchange Board of India[5] (“Takano”), in the context of a show-cause notice issued under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003, had held that the actual test is not to see whether the material required to be disclosed is relied upon in the show-cause notice, it is to see whether the material is relevant for the purpose of adjudication, since in all probability such material will influence the decision of the authority. The Court had discussed its earlier judgment in Natwar Singh v. Directorate of Enforcement and Anr[6] (“Natwar Singh”), which had held that only the documents relied upon in the notice are required to be disclosed. It clarified that the law in Natwar Singh distinguishes between two stages, i.e., the initial and the adjudication stage. In the initial stage, where the authority is deciding whether an enquiry needs to be conducted, only the materials relied upon in the notice may be disclosed. Whereas in the adjudication stage, where the authority adjudicates on allegations of contravention, all material in possession of the authority are required to be disclosed.

Ambiguity in Standard

However, the Supreme Court in Kavi Arora v. Securities and Exchange Board of India (SEBI)[7] (“Kavi Arora”), while dealing with a challenge to a show-cause notice issued under various SEBI regulations, relying on Natwar Singhheld that the documents which were not relied upon by the authority need not be supplied to the noticee. Kavi Arora was an adjudication case for monetary penalty imposition. Further, the Gujarat High Court in Jagdish Prasad Saboo v. IDBI Bank Limited[8], while dealing with a challenge to a wilful default declaration order, had held that in a case where the borrower was provided with the relevant findings of the forensic audit report, along with the show-cause notice, a challenge by the borrower that the entire forensic audit report was not supplied, could not be sustained. In this case, the principles elucidated in the Takano decision were not applied to the Master Circular proceedings.

Findings of the Bombay High Court

The Court relied on Takano to explain how the Master Circular must be construed. It held that the means of ensuring transparency would necessarily imply that the principles of natural justice, including the need to supply relevant material to the noticee, is implicit in the Master Circular. It clarified that such material and information for disclosure would be all ‘relevant’ material, which may undermine or form the basis of the allegations in question and not just information that is ‘relied upon’ or ‘referred to’ in the show-cause notice. The Court also directed banks and financial institutions to identify and disclose details of the members of the Identification Committee and the Review Committee to the noticee and pass reasoned orders.

Concluding remarks

The law laid down in Takano has been reinforced to proceedings under the Master Circular. Thus, as per the directions of the Bombay High Court, banks would be required to supply all relevant material to the noticee, which includes not only incriminating material but also exculpatory material. Reiterating the need for reasoned orders and identification of members of the Committees are also important measures in furtherance of incorporating the principles of natural justice in the wilful defaulter adjudication process.

[1] 2024 SCC OnLine Bom 745

[2] (2019) 6 SCC 787

[3] (2018) SCC OnLine Bom 1761

[4] 2021 SCC OnLine Bom 4604

[5] 2022 8 SCC 162

[6] 2010 SCC OnLine SC 1128

[7] 2022 SCC OnLine SC 1217