Case Note & Summary
The petitioner, B.G. Chandrashekar, a borrower from Canara Bank, defaulted on a loan of Rs. 7,07,94,378/-. The bank initiated recovery proceedings under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) and filed a recovery petition O.A. No. 149/2024 before the Debts Recovery Tribunal (DRT), which was pending. Subsequently, the bank issued a show cause notice dated 25.02.2025 to the petitioner, calling upon him to show cause why his account should not be declared as a willful defaulter's account. The petitioner challenged this show cause notice before the High Court of Karnataka under Articles 226 and 227 of the Constitution of India. The court heard both sides and found that the bank had not applied its mind before issuing the show cause notice, as the notice was issued without considering the petitioner's reply or providing an adequate opportunity of hearing as mandated by the RBI Master Circular on Willful Defaulters. The court held that the show cause notice was unsustainable and quashed it, allowing the writ petition.
Headnote
A) Banking Law - Willful Defaulter - Show Cause Notice - RBI Master Circular on Willful Defaulters - The court examined whether a show cause notice issued by a bank for declaring a borrower as a willful defaulter was valid when the bank had already initiated recovery proceedings under SARFAESI Act and before the DRT. The court held that the show cause notice was issued without application of mind and without providing an opportunity of hearing as required under the RBI Master Circular, and therefore quashed the notice. (Paras 1-6)
B) Constitutional Law - Writ Jurisdiction - Maintainability - Articles 226 and 227 of the Constitution of India - The court considered whether a writ petition against a show cause notice is maintainable. The court held that a show cause notice can be challenged if it is without jurisdiction or in violation of principles of natural justice, and in this case, the notice was quashed as it was issued without application of mind. (Paras 1-6)
Issue of Consideration
Whether the show cause notice issued by the bank for declaring the petitioner as a willful defaulter is sustainable in law when the bank has not applied its mind and has not provided an opportunity of hearing as mandated under the RBI Master Circular.
Final Decision
The writ petition is allowed. The impugned show cause notice dated 25.02.2025 is quashed.
Law Points
- Willful defaulter declaration requires strict compliance with RBI Master Circular
- Show cause notice must be preceded by application of mind
- Opportunity of hearing must be granted before declaring willful defaulter
- Writ petition maintainable against show cause notice if it is without jurisdiction or in violation of principles of natural justice
Case Details
2025 LawText (KAR) (04) 38
WP No. 6850 of 2025 (GM-RES)
Rudrabhushan C. B. for petitioner, Vinay Swamy C. for respondent
The Authorized Officer, Canara Bank
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Nature of Litigation
Writ petition challenging a show cause notice issued by a bank for declaring the petitioner as a willful defaulter.
Remedy Sought
Quashing of the show cause notice dated 25.02.2025 issued by the respondent bank.
Filing Reason
The petitioner challenged the show cause notice on the ground that it was issued without application of mind and without providing an opportunity of hearing as required under the RBI Master Circular.
Previous Decisions
The bank had initiated recovery proceedings under SARFAESI Act and filed a recovery petition O.A. No. 149/2024 before the DRT, which was pending.
Issues
Whether the show cause notice for declaring the petitioner as a willful defaulter was issued with proper application of mind?
Whether the show cause notice violated principles of natural justice?
Submissions/Arguments
The petitioner argued that the show cause notice was issued without application of mind and without providing an opportunity of hearing as required under the RBI Master Circular.
The respondent bank argued in support of the show cause notice.
Ratio Decidendi
A show cause notice for declaring a borrower as a willful defaulter must be issued after proper application of mind and in compliance with the RBI Master Circular, which mandates an opportunity of hearing. If the notice is issued without such compliance, it is liable to be quashed.
Judgment Excerpts
The petitioner is before this Court calling in question a show cause notice dated 25.02.2025, issued by the respondent – Canara bank, which seeks the petitioner to show cause as to why the account of the petitioner should not be declared as a willful defaulter’s account.
The bank takes steps in terms of the provisions of the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, against the petitioner and registers a recovery petition in O.A.No.149/2024 for recovery of ` 7,07,94,378/-, before the Debts Recovery Tribunal (for short ‘DRT’).
What drives the petitioner before this Court is not the proceedings pending before the DRT. It is the action that the bank seeks to initiate after having initiated the proceedings before the DRT.
Procedural History
The bank initiated recovery proceedings under SARFAESI Act and filed O.A. No. 149/2024 before the DRT. Subsequently, the bank issued a show cause notice dated 25.02.2025 for declaring the petitioner as a willful defaulter. The petitioner filed WP No. 6850 of 2025 before the High Court of Karnataka challenging the show cause notice. The High Court heard the matter and allowed the petition, quashing the show cause notice.
Acts & Sections
- Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002:
- Constitution of India: Articles 226, 227
