Case Note & Summary
Background: The dispute arose out of a writ petition filed before the High Court of Judicature at Bombay, Nagpur Bench, challenging the declaration of the petitioners as wilful defaulters by Bank of Maharashtra under the Reserve Bank of India Master Circular on Wilful Defaulters. The petitioners were borrowers who had availed various agricultural term loans, term loans, and cash credit facilities. Facts: The petitioners availed an Agriculture Term Loan of Rs. 56 lakh (take over), another Agriculture Term Loan of Rs. 55 lakh, two Term Loans of Rs. 74.72 lakh each in the individual names of petitioner Nos. 1 and 2, and an Agricultural Cash Credit Limit of Rs. 7 lakh from respondent bank. On 12.04.2019, the bank issued a show cause notice requiring the petitioners to explain why they should not be declared wilful defaulters under the Master Circular dated 01.07.2015. The petitioners submitted detailed replies on 25.04.2019 and 07.09.2019 denying default. They were called for personal hearing before the Empowered Committee. On 25.11.2019, the bank communicated that wilful default had been established beyond doubt and that the bank was proceeding with the process of declaring them wilful defaulters. Thereafter, the bank published photographs of the petitioners as wilful defaulters in newspapers, prompting the writ petition. Legal Issues: The core issue was whether the bank complied with the procedural requirements of the RBI Master Circular on Wilful Defaulters before declaring the petitioners as wilful defaulters, particularly whether it issued and served a reasoned order by the first committee as mandated. Arguments: Petitioners contended that the declaration was made without any reasoned order as required under the RBI Guidelines and was contrary to the Supreme Court decision in State Bank of India v. Jah Developers Private Limited. Respondent bank argued that due process was followed: the committee was satisfied on material, show cause notice was served, reply considered, personal hearing granted, and the High Level Committee's decision was approved by the Review Committee. Court's Analysis: The High Court examined Clause 2.1.3 and Clause 3 of the RBI Master Circular and the Supreme Court precedent. The Court noted that wilful default must be intentional, deliberate and calculated, and the identification mechanism requires the first committee to issue an order recording the fact of wilful default and reasons for the same, serve it on borrower, permit representation within 15 days, and the Review Committee must pass and serve a reasoned order. In the present case, although show cause notice, reply, personal hearing, and communication dated 25.11.2019 existed, the respondents failed to produce any order by the first committee declaring wilful default as required. Consequently, the Court concluded that the RBI Guidelines had not been complied with. Decision: The available judgment text ends before stating the final operative direction; however, the Court's finding of non-compliance establishes that the bank's declaration was procedurally flawed.
Headnote
A) Banking Law - Wilful Defaulter Declaration - RBI Master Circular on Wilful Defaulters 2015, Clause 2.1.3 and Clause 3 - The Circular defines wilful default to include default by a unit with capacity to honour obligations, diversion or siphoning of funds, or disposal of secured assets without bank's knowledge, and requires default to be intentional, deliberate and calculated. The mechanism mandates a first committee to examine evidence, issue show cause notice, consider submissions, grant personal hearing if necessary, and issue a reasoned order recording wilful default and reasons, which must be served on borrower; borrower may then represent to Review Committee within 15 days, and Review Committee must pass reasoned order served on borrower. In present case, respondent bank failed to produce any order by first committee declaring petitioners as wilful defaulters, leading to non-compliance with guidelines. Held that RBI Guidelines were not complied with due to absence of reasoned order (Paras 16-27). B) Banking Law - Procedural Safeguards - Supreme Court Precedent in State Bank of India v. Jah Developers Private Limited, (2019) 6 SCC 787 - The Supreme Court held that first committee's order must be given to borrower as soon as made, borrower can represent within 15 days to Review Committee, and Review Committee must pass reasoned order served on borrower; these steps were incorporated into Revised Circular dated 01.07.2015. High Court applied this binding precedent to assess bank's procedure, concluding that failure to issue/serve reasoned order vitiates wilful defaulter declaration (Paras 19-20).
Issue of Consideration
Whether respondent Bank of Maharashtra complied with procedural requirements of RBI Master Circular on Wilful Defaulters before declaring petitioners as wilful defaulters, particularly issuance of reasoned order by first committee and service of such order.
Law Points
- RBI Master Circular on Wilful Defaulters mandates reasoned order by first committee and review committee
- wilful default requires intentional deliberate calculated conduct
- borrower must be served with reasoned order and given 15 days to represent
- non-compliance vitiates declaration
