Mr. Sanjay Bajaj, Mr. Shivam Takkar and Mr. Sarthak Sehgal, Advs v. NITA PURI

Judgment

1. These appeals assail substantially similar judgments passed by a learned Single Judge of this Court in writ petitions which raised substantially similar challenges. They are, therefore, being disposed of by this common judgment. However, for the sake of convenience, we propose to treat LPA 396/2024 as the lead case and to extrapolate our decision in that appeal to the other appeals before us. LPA 294/2024 and other connected matters LPA 396/2024 [Bank of Baroda v Ratul Puri] The lis

2. The Bank of Baroda1 assails judgment dated 29 February 2024 passed by a learned Single Judge of this Court in WP (C) 4181/20232.

3. By the impugned judgment, the order dated 23 March 2023 passed by the Review Committee of the BOB, declaring the respondent to be a “wilful defaulter” within the meaning of Clause

2.1.3 of the Master Circular on Wilful Defaulters, 20153, issued by the Reserve Bank of India4, has been set aside. Background

4. Moser Baer India Ltd5 availed loans from various banks. These included a loan from BOB, which was sanctioned vide letters dated 12 December 2006 and 24 April 2010. At the time of availing of the loan, the respondent Ratul Puri was a whole-time director of MBIL. In 2010, he decided to exit from MBIL, though he continued to remain a director on its board.

5. Following the decline in the fortunes of MBIL, BOB and other 1 “BOB” hereinafter 2 Ratul Puri v Bank of Baroda 3 “Master Circular” hereinafter 4 “RBI” hereinafter 5 “MBIL” hereinafter LPA 294/2024 and other connected matters lenders, which lent monies to MBIL, found MBIL to be a fit case to consider debt restructuring. A Joint Lenders Meet6, of all lenders of MBIL, therefore, was convened on 3 February 2012. Among the lenders who participated in the JLM was BOB. MBIL placed a restructuring plan before the JLM. The JLM, after considering the plan, decided to admit MBIL for Corporate Debt Restructuring7, in accordance with the CDR Master Circular issued by the RBI.

6. To ascertain sustainability of the CDR, MBIL was required to submit a Flash Report, which would set out the reasons for its decline, its viability and its plan for revival. The Flash Report was intended to be forwarded by the lenders of MBIL to an independent agency for obtaining a Techno Economic Viability Report8, which would indicate whether the restructuring plan proposed by MBIL was financially viable.

7. In terms of the aforesaid directions, MBIL submitted a Flash Report with the CDR cell of the lender banks on 18 February 2012. Among the reasons cited in the Flash Report to which the financial decline of MBIL was attributable, was the inability of MBIL to realise investments made in its two subsidiaries, Moser Baer Photo Voltaic Ltd9 and Moser Baer Solar Ltd10. MBPV was later renamed Helios Photo Voltaic Ltd11. 6 “JLM” hereinafter 7 “CDR” hereinafter 8 “TEV Report” hereinafter 9 “MBPV” hereinafter 10 “MBSL” hereinafter 11 “HPVL” hereinafter LPA 294/2024 and other connected matters

8. After perusing the flash report submitted by MBIL, the CDR Empowered Group12 decided, on 24 February 2012, to admit the proposal of MBIL for restructuring. In the decision, MBIL was placed in the Class-B category under the CDR Scheme, which covered “Corporates/promoters affected by external factors and also having weak resources, inadequate vision and not having support of professional management”.

9. The monitoring bank of the lenders was the Central Bank of India13. On 4 April 2012, MBIL informed the Central Bank that the respondent was no longer associated with the day-to-day functioning of the MBIL. It was pointed out that he had exited MBIL and it was requested that the CDR proposal submitted by MBIL be considered taking into account this fact.

10. On 30 April 2012, the respondent resigned as Executive Director of MBIL and submitted Form-32 with the Registrar of Companies14 to that effect. He also, therefore, ceased to be a shareholder of MBIL and transferred his shareholding in MBIL to his father.

11. The lender banks forwarded the flash report submitted by MBIL to an external agency Ernst and Young15 for examination. E & Y submitted its detailed TEV Report on 9 June 2012, which opined that MBIL was considered to be viable. 12 “CDR-EG” hereinafter 13 “Central Bank” hereinafter 14 “ROC” hereinafter 15 “E & Y” hereinafter LPA 294/2024 and other connected matters

12. On 20 July 2012, another JLM was convened of all the lender banks, including BOB. The JLM considered the Flash Report submitted by MBIL, the TEV report of E & Y and a stock audit report of RRCA & Associates, and issued a Final Restructuring Scheme16 dated 20 July 2012.

13. In accordance with the FRS, MBIL and the Consortium of Banks, including BOB and the Central Bank as the monitoring institution, signed a Master Restructuring Agreement17 dated 27 December 2012 for implementation of the CDR package agreed between the parties. Clause 6.1 (iv) of the MRA required MBIL to execute a Trust and Retention Account18. Consequent to execution of the TRA agreement, MBIL was required to transact, for its day-to-day functioning, only through the TRA account.

14. On 16 November 2012, the respondent resigned as Director of MBIL and filed Form-32 to that effect, with the ROC. This constituted complete exit, by the respondent, from MBIL.

15. In terms of clause 6.1(iv) of the MRA, the TRA Agreement was executed between the lender banks and the MBIL on 12 February

16. Despite all these efforts, MBIL was unable to repay the loan 16 “FRS” hereinafter 17 “MRA” hereinafter 18 “TRA” hereinafter LPA 294/2024 and other connected matters amounts and committed defaults. On account of these defaults, the lender banks decided to exit from the approved CDR Scheme on 10 October 2016.

17. In 2017, Alchemist Asset Reconstruction Company Ltd., one of the financial creditors of MBIL, filed an application before the National Company Law Tribunal19 under Section 7(1)20 of the Insolvency and Bankruptcy Code 201621 for triggering the Corporate Insolvency Resolution Process22 of MBIL. Vide its order dated 14

November 2017, the NCLT appointed one Mr. Anil Kohli as the Interim Resolution Professional23 of MBIL. The IRP directed M/s. GSA Associates, Chartered Accountants to conduct a forensic audit of MBIL. GSA Associates submitted its Forensic Audit Report24 on 3 June 2019. 19 “NCLT”, hereinafter 20 7. Initiation of corporate insolvency resolution process by financial creditor. – A financial creditor either by itself or jointly with other financial creditors, or any other (1) person on behalf of the financial creditor, as may be notified by the Central Government, may file an application for initiating corporate insolvency resolution process against a corporate debtor before the Adjudicating Authority when a default has occurred: Provided that for the financial creditors, referred to in clauses (a) and (b) of sub-section (6-A) of Section 21, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such creditors in the same class or not less than ten per cent. of the total number of such creditors in the same class, whichever is less: Provided further that for financial creditors who are allottees under a real estate project, an application for initiating corporate insolvency resolution process against the corporate debtor shall be filed jointly by not less than one hundred of such allottees under the same real estate project or not less than ten per cent. of the total number of such allottees under the same real estate project, whichever is less: Provided also that where an application for initiating the corporate insolvency resolution process against a corporate debtor has been filed by a financial creditor referred to in the first and second provisos and has not been admitted by the Adjudicating Authority before the commencement of the Insolvency and Bankruptcy Code (Amendment) Act, 2020, such application shall be modified to comply with the requirements of the first or second proviso within thirty days of the commencement of the said Act, failing which the application shall be deemed to be withdrawn before its admission. Explanation.—For the purposes of this sub-section, a default includes a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. 21 “IBC”, hereinafter 22 “CIRP”, hereinafter 23 “IRP”, hereinafter LPA 294/2024 and other connected matters

18. On 13 March 2020, BOB issued a show cause notice to the respondent to show cause as to why he be not declared a wilful defaulter under the Master Circular. The show cause notice contained six allegations against the respondent. Allegations 2 to 6 were subsequently dropped, and the present dispute, therefore, essentially concerns Allegation 1, which read: “MBIL has made substantial investment in subsidiaries and related entities amounting to Rs.1586.75 Cr as on 31.12.13. During the period from 01.04.13 to 31.03.15 provision and write off made amounting to Rs.287.03 Cr.”

19. The respondent responded to the aforesaid show cause notice on 30 March 2020 and 12 August 2020. The respondent sought to be supplied the documents on the basis of which it was proposed to declare him a wilful defaulter. In response thereto, BOB on 11 January 2021 forwarded a copy of the FAR to the respondent. Vide communication dated 2 June 2021, the respondent submitted that the FAR did not disclose any event of wilful default on his part.

20. This was followed by an opportunity of personal hearing which the respondent availed on 5 August 2021 following which he submitted written submissions on 4 September 2021. In the said written submissions, apart from pointing out that he had nothing to do with the affairs of the MBIL during the period in question, it was further submitted that investments of MBIL in its subsidiaries were made from its internal accruals, and not from borrowed funds and that therefore, these investments could not be used as a justification to 24 “FAR”, hereinafter LPA 294/2024 and other connected matters declare the respondent to be a wilful defaulter. It was further pointed out that the details of these investments had been disclosed in the audited financial statements of MBIL, which had been submitted to all lenders including BOB.

21. The Identification Committee of the BOB proceeded to pass order dated 19 August 2022 declaring the respondent to be a wilful defaulter in terms of the Master Circular. Of the six allegations against the respondent in the show cause notice dated 13 March 2020, Allegations 2 to 6 were dropped. Allegation 1 was, however, confirmed and, consequently, the respondent was declared as a wilful defaulter in terms of the Master Circular. In arriving at this conclusion, the Identification Committee observed that during the period when the funds had been invested by MBIL in its subsidiaries, which constituted diversion and siphoning of funds in terms of the Master Circular, the respondent was a whole time Director in MBIL and in complete control of its affairs. It was further opined by the Identification Committee that the investments made by the MBIL in its subsidiaries, which triggered a shortage of funds, amounted to diversion of funds in terms of Clause 2.1.3 (b) and (c) of the Master Circular. Following these findings, the Identification Committee held the respondent to be a wilful defaulter.

22. The respondent filed a Review Petition challenging the findings of the Identification Committee, on 22 September 2022.

23. The Review Committee by order dated 23 March 2023 LPA 294/2024 and other connected matters confirmed the findings of the Identification Committee.

24. Aggrieved thereby, the respondent approached this Court by means of WP (C) 4181/2023. The prayer clause in the writ petition read thus: “Hence, in view of the circumstances mentioned herein above, the Petitioner herein most respectfully pray that this Hon’ble Court may graciously be pleased to: a. Issue a writ/ order/ direction of mandamus and/or certiorari quashing/setting aside the Order passed by the Review Committee of the Respondent Bank in its meeting held on 23.03.2023 (impugned order), by which order it has arbitrarily, unfairly and unreasonably declared the name of the Petitioner as a Willful Defaulter. b. Issue a writ/ order/ direction prohibiting Respondent and or/its servants, agents, assigns and officers and/or anyone claiming through or under them from giving any effect and/or further effect and/or taking any steps and/or acting in furtherance of the Review Committee Order dated 23.03.2023, in any manner whatsoever. Pass such other orders as may be deemed fair and equitable in the facts of the case and in the interests of justice.”

25. By the impugned judgment, the learned Single Judge has allowed WP(C) 4181/2023. The present appeal, at the instance of the BOB, challenges the said decision. The Impugned Judgment

26. The findings of the learned Single Judge may be enumerated thus: LPA 294/2024 and other connected matters (i) The Master Circular was issued by the RBI in exercise of the powers conferred by Sections 21 and 35 A of the Banking Regulation Act, 1949. Clause 2.1.3 thereof read thus: “2.1.3 Wilful Default: A ’wilful default’ would be deemed to have occurred if any of the following events is noted: ***** The unit has defaulted (b) payment / repayment obligations to the lender and has not utilised the finance from the lender for the specific purposes for which finance was availed of but has diverted the funds for other purposes. in meeting in meeting The unit has defaulted (c) payment / repayment obligations to the. lender and has siphoned off the funds so that the funds have not been utilised for the specific purpose for which finance was availed of, nor are the funds available with the unit in the form of other assets. ***** The identification of the wilful default should be made keeping in view the track record of the borrowers and should not be decided on the basis of isolated transactions/incidents. The default to be categorised as wilful must be intentional, deliberate and calculated.” (ii) Thus, “wilful default” could be said to have taken place only if the loan amounts lent by the bank, which constituted the “borrowed funds”, were diverted or siphoned off by the borrower, for purposes other than those for which the loan was granted. (iii) Clause 2.2 of the Master Circular defined diversion and LPA 294/2024 and other connected matters siphoning off funds thus: “2.2 Diversion and siphoning of funds: The terms “diversion of funds” and “siphoning of funds” should construe to mean the following: -

2.2.1 Diversion of funds, referred to at para 2.1(b) above, would be construed to include any one of the undernoted occurrences: (a) utilisation of short-term working capital funds for long-term purposes not in conformity with the terms of sanction; (b) deploying borrowed funds for purposes / activities or creation of assets other than those for which the loan was sanctioned; transferring (c) borrowed subsidiaries / Group companies or other corporates by whatever modalities; routing of funds through any bank other than (d) the lender bank or members of consortium without prior permission of the lender; investment in other companies by way of instruments without / debt (e) acquiring equities approval of lenders; shortfall in deployment of funds vis-(cid:224)-vis the (f) amounts disbursed / drawn and the difference not being accounted for.

2.2.2 Siphoning of funds, referred to at para 2.1(c) above, should be construed to occur if any funds borrowed from banks / FIs are utilised for purposes un-related to the operations of the borrower, to the detriment of the financial health of the entity or of the lender. The decision as to whether a particular instance amounts to siphoning of funds would have to be a judgement of the lenders based on objective facts and circumstances of the case.” Again, it was clear from Clause 2.2 that funds could be said to LPA 294/2024 and other connected matters have been diverted or siphoned off only if they were borrowed funds. It was only when borrowed funds were deployed or used for a purpose other than the purpose for which the loan was sanctioned, that they could be said to have been diverted or siphoned off. Further, the decision regarding diversion or siphoning off funds had to be made by the Bank based on the objective facts and circumstances of the case. (iv) Clause 3 of the Master Circular provided the mechanism for identification of a borrower as a wilful defaulter. The evidence in that regard was first to be examined by the Identification Committee headed by an Executive Director or equivalent and consisting of two other senior officers of the bank of the rank of GM /DGM. If the Identification Committee concluded that an event of wilful default had occurred, it would issue a show cause notice to the borrower. After considering the response of the borrower, a final order on the aspect of whether the borrower could be treated as a wilful defaulter would be issued by the Identification Committee, prior to which the borrower would be afforded an opportunity of personal hearing. The decision of the Identification Committee would be reviewed by a Review Committee headed by the Chairman/ MD/CEO and also comprising two other independent non- executive Directors of the bank. A declaration of a borrower as a wilful defaulter would be final only after confirmation by the Review Committee. LPA 294/2024 and other connected matters (v) Clause 3 further provided that in terms of Section 2(60)25 of the Companies Act, 2013, an officer could be treated as a wilful defaulter only if he was a whole time Director or fell within one of the categories of exceptions enumerated in the said clause. (vi) The consequences of declaration of a person as a wilful defaulter were drastic. A wilful defaulter was barred from availing any loan facility in the future or floating any new venture. He was also exposed to criminal proceedings. A label of wilful defaulter also affected the reputation of the person concerned, with whom business entities would hesitate to conduct any business. Financial institutions would also be chary of providing loans to wilful defaulters. Characterization as a wilful defaulter, therefore, was in the nature of a financial death knell of the individual or entity concerned. The drastic nature of declaration of a person as a wilful defaulter had also been noted by the Supreme Court in its judgment in SBI v Jah 25 (60) “officer who is in default”, for the purpose of any provision in this Act which enacts that an officer of the company who is in default shall be liable to any penalty or punishment by way of imprisonment, fine or otherwise, means any of the following officers of a company, namely: whole-time director; (i) key managerial personnel; (ii) (iii) where there is no key managerial personnel, such director or directors as specified by the Board in this behalf and who has or have given his or their consent in writing to the Board to such specification, or all the directors, if no director is so specified; any person who, under the immediate authority of the Board or any key managerial (iv) personnel, is charged with any responsibility including maintenance, filing or distribution of accounts or records, authorises, actively participates in, knowingly permits, or knowingly fails to take active steps to prevent, any default; (v) any person in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act, other than a person who gives advice to the Board in a professional capacity; (vi) every director, in respect of a contravention of any of the provisions of this Act, who is aware of such contravention by virtue of the receipt by him of any proceedings of the Board or participation in such proceedings without objecting to the same, or where such contravention had taken place with his consent or connivance; (vii) registrars and merchant bankers to the issue or transfer; in respect of the issue or transfer of any shares of a company, the share transfer agents, LPA 294/2024 and other connected matters Developers26. In the said decision, the Supreme Court had underscored the necessity of construing the Master Circular reasonably, in the matter of characterisation of anyone as a wilful defaulter thereunder. Other judgments which were relevant in this regard were Sukhwant Singh v State of Punjab27, Subramanian Swami v UOI28 and Om Prakash Chautala v Kanwar Bhan29. (vii) Given the drastic consequences which ensued as a result of declaration of someone as wilful defaulter, the validity of such an order, when questioned, required a close scrutiny as to whether it fell within the four corners of the Master Circular. (viii) Adverting, after alluding to these aspects, to the core issue of whether the respondent could be regarded as a wilful defaulter within the meaning of the Master Circular, the learned Single Judge observed and held as under: (a) By order dated 28 November 2023, the learned Single Judge had required the BOB to place, on record, the evidence on the basis of which the Identification Committee concluded that an event of wilful default had occurred. In compliance therewith, the BOB had placed the Minutes of Meeting dated 24 February 2020 on record, under which it was decided to issue a show cause notice to the respondent, proposing to declare him a