Allahabad High Court

1. Heard Sri Rahul Agarwal and Sri Vedant Agarwal, learned counsel appearing on behalf of petitioners and Sri Jainendra Kumar Mishra, learned counsel appearing on behalf of the respondent Bank.

2. In the present writ petition following prayers have been made by the petitioners:- "(i) Issue writ, order or direction in the nature of Certiorari quashing impugned order dated 28.05.2025 (Annexure-1 to the writ petition) passed by Punjab National Bank's Wilful Defaulter Review Committee declaring petitioners as wilful defaulters; (ii) Issue writ, order or direction in the nature of Certiorari quashing impugned order dated 21.01.2025 (Annexure-2 to the writ petition) passed by Punjab National Bank's Wilful Defaulter Identification Committee declaring petitioners as wilful defaulters; (iii) Issue any other suitable writ, order or direction, which this Hon'ble Court may deem fit and proper in the facts and circumstances of the case; (iv) Award costs of the petition to the petitioners throughout."

3. The main issue in the present writ petition is with regard to the respondent bank characterizing the petitioners' company and its Directors as wilful defaulters under the master guidelines of the Reserve Bank of India (hereinafter referred to as 'the RBI').

4. It is to be noted that a show cause was issued to the petitioners and the 2 WRIC No. 29794 of 2025 reply thereto was filed by the petitioners. The above show cause notice was based on visit/verification report dated February 1, 2022. The verification report has come to a finding that there was insufficient stock as compared to the stock statement provided by the petitioners dated February 28, 2021. It is to be further noted that the verification report only mentions the value of the stock and not the quantity of the same.

5. Learned counsel appearing on behalf of the petitioners has submitted that a detailed reply was submitted by them wherein they have categorically submitted that the stocks had depreciated in value due to the fact that the company was under insolvency and closed since 2019 and no sales were made during that period. Owing to the same, the craft paper and other materials that were lying in open, had depreciated in value. Several grounds have been taken by the petitioners in their reply including improper basis for wilful default characterization done by the bank. He further submits that the ground that has been taken, that is, siphoning of funds is nowhere proved as the same does not meet the criteria of the RBI guidelines.

6. Learned counsel appearing on behalf of the respondents submits that the main allegation is that the goods were sold by the petitioners and the money was not deposited in the Bank as per the terms and conditions of the cash credit facility.

7. Upon perusal of the documents and after hearing the learned counsel appearing on behalf of the parties, one may first examine the definition of siphoning of funds at clause 3(s) of the Master Circular of the RBI dated July 30, 2024, which reads as follows:- 3(s) "siphoning of funds" shall be construed to have occurred if any funds availed using credit facility from lenders are utilised for purpose unrelated to the operations of the borrower."

8. Another relevant definition, that is, to be looked into is of wilful default at clause 3(t), which reads as follows:- "3(t) "wilful default" (i) by a borrower shall be deemed to have occurred when the borrower defaults in meeting payment/ repayment obligations to the lender and any one or more of the following features are noticed: (A) the borrower has the capacity to honour the said obligations; (B) the borrower has diverted the funds availed under the credit facility from lender; 3 WRIC No. 29794 of 2025 (C) the borrower has siphoned off the funds availed under the credit facility from lender; (D) the borrower has disposed of immovable or movable assets provided for the purpose of securing the credit facility without the approval of the lender; (E) The borrower or the promoter has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment and other covenants and conditions. (ii) by a guarantor shall be deemed to have occurred if the guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues or has disposed of immovable or movable assets provided for the purpose of securing the credit facility, without the approval of the lender or has failed in commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment."

9. Upon perusal of the show cause notice, it appears that the main ground raised by the bank is that of siphoning of funds. The relevant clause in the show cause notice is as follows:- "Siphoning of Fund: The borrower has defaulted in payment/repayment obligation to the bank and as per visit report dated 01.02.2022, the borrower has disposed off the stocks to the tune of Rs.11.48 crore but the sale proceeds of the same did not deposit in loan account."

10. Our understanding of the term 'siphoning of funds' would relate to a situation where a borrower uses the credit facility other than for purposes of which loan/cash credit has been taken. For instance, if a cash credit for a sum of Rs.10 crores is taken for manufacture of a particular product and the borrower used Rs.5 crores of the amount for purchase of certain assets unrelated to the manufacture of product, the same would amount to siphoning of funds.

11. In the present case, there is no such allegation whatsoever. In fact, the allegation seems to suggest that the funds that were provided by the bank were used in production of a product for which the cash credit has been availed, and thereafter, the stocks were sold in the open market without 4 WRIC No. 29794 of 2025 returning/paying back the money to the bank as per the terms and conditions of the cash credit facility.

12. In our prima facie view, the above allegation would fall under the term 'wilful default' under clause 3(t)(B) that reads as under :- "3(t)(B) the borrower has diverted the funds availed under the credit facility from lender."

13. However, this does not appear to be the reason for show cause notice and the subsequent passing of the order treating the petitioners as wilful defaulters.

14. We are also of the view that the submissions made by petitioners in their reply have not been taken into account and the reasons for holding the petitioners as wilful defaulters is tenuous and does not meet the criteria under the RBI guideline.

15. In light of the same, the impugned orders dated January 21, 2025 and May 28, 2025 are quashed and set aside with liberty granted to the bank to grant another opportunity of hearing to the petitioners, and thereafter, pass a fresh order keeping in mind the principles of natural justice.

16. With the above observations, this writ petition is disposed of.

17. We make it clear that the observations made in this order are prima facie and tentative in nature and would not bind the respondent bank in proceeding further.

18. The petitioners shall also be provided with the relied upon verification report dated February 1, 2022, that has not been provided to them till date, within a period of two weeks from date. September 15, 2025 Dev (Praveen Kumar Giri,J.) (Shekhar B. Saraf,J.)

1. Heard Sri Rahul Agarwal and Sri Vedant Agarwal, learned counsel appearing on behalf of petitioners and Sri Jainendra Kumar Mishra, learned counsel appearing on behalf of the respondent Bank.

2. In the present writ petition following prayers have been made by the petitioners:- "(i) Issue writ, order or direction in the nature of Certiorari quashing impugned order dated 28.05.2025 (Annexure-1 to the writ petition) passed by Punjab National Bank's Wilful Defaulter Review Committee declaring petitioners as wilful defaulters; (ii) Issue writ, order or direction in the nature of Certiorari quashing impugned order dated 21.01.2025 (Annexure-2 to the writ petition) passed by Punjab National Bank's Wilful Defaulter Identification Committee declaring petitioners as wilful defaulters; (iii) Issue any other suitable writ, order or direction, which this Hon'ble Court may deem fit and proper in the facts and circumstances of the case; (iv) Award costs of the petition to the petitioners throughout."

3. The main issue in the present writ petition is with regard to the respondent bank characterizing the petitioners' company and its Directors as wilful defaulters under the master guidelines of the Reserve Bank of India (hereinafter referred to as 'the RBI').

4. It is to be noted that a show cause was issued to the petitioners and the 2 WRIC No. 29794 of 2025 reply thereto was filed by the petitioners. The above show cause notice was based on visit/verification report dated February 1, 2022. The verification report has come to a finding that there was insufficient stock as compared to the stock statement provided by the petitioners dated February 28, 2021. It is to be further noted that the verification report only mentions the value of the stock and not the quantity of the same.

5. Learned counsel appearing on behalf of the petitioners has submitted that a detailed reply was submitted by them wherein they have categorically submitted that the stocks had depreciated in value due to the fact that the company was under insolvency and closed since 2019 and no sales were made during that period. Owing to the same, the craft paper and other materials that were lying in open, had depreciated in value. Several grounds have been taken by the petitioners in their reply including improper basis for wilful default characterization done by the bank. He further submits that the ground that has been taken, that is, siphoning of funds is nowhere proved as the same does not meet the criteria of the RBI guidelines.

6. Learned counsel appearing on behalf of the respondents submits that the main allegation is that the goods were sold by the petitioners and the money was not deposited in the Bank as per the terms and conditions of the cash credit facility.

7. Upon perusal of the documents and after hearing the learned counsel appearing on behalf of the parties, one may first examine the definition of siphoning of funds at clause 3(s) of the Master Circular of the RBI dated July 30, 2024, which reads as follows:- 3(s) "siphoning of funds" shall be construed to have occurred if any funds availed using credit facility from lenders are utilised for purpose unrelated to the operations of the borrower."

8. Another relevant definition, that is, to be looked into is of wilful default at clause 3(t), which reads as follows:- "3(t) "wilful default" (i) by a borrower shall be deemed to have occurred when the borrower defaults in meeting payment/ repayment obligations to the lender and any one or more of the following features are noticed: (A) the borrower has the capacity to honour the said obligations; (B) the borrower has diverted the funds availed under the credit facility from lender; 3 WRIC No. 29794 of 2025 (C) the borrower has siphoned off the funds availed under the credit facility from lender; (D) the borrower has disposed of immovable or movable assets provided for the purpose of securing the credit facility without the approval of the lender; (E) The borrower or the promoter has failed in its commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment and other covenants and conditions. (ii) by a guarantor shall be deemed to have occurred if the guarantor does not honour the guarantee when invoked by the lender, despite having sufficient means to make payment of the dues or has disposed of immovable or movable assets provided for the purpose of securing the credit facility, without the approval of the lender or has failed in commitment to the lender to infuse equity despite having the ability to infuse the equity, although the lender has provided loans or certain concessions to the borrower based on this commitment."

9. Upon perusal of the show cause notice, it appears that the main ground raised by the bank is that of siphoning of funds. The relevant clause in the show cause notice is as follows:- "Siphoning of Fund: The borrower has defaulted in payment/repayment obligation to the bank and as per visit report dated 01.02.2022, the borrower has disposed off the stocks to the tune of Rs.11.48 crore but the sale proceeds of the same did not deposit in loan account."

10. Our understanding of the term 'siphoning of funds' would relate to a situation where a borrower uses the credit facility other than for purposes of which loan/cash credit has been taken. For instance, if a cash credit for a sum of Rs.10 crores is taken for manufacture of a particular product and the borrower used Rs.5 crores of the amount for purchase of certain assets unrelated to the manufacture of product, the same would amount to siphoning of funds.

11. In the present case, there is no such allegation whatsoever. In fact, the allegation seems to suggest that the funds that were provided by the bank were used in production of a product for which the cash credit has been availed, and thereafter, the stocks were sold in the open market without 4 WRIC No. 29794 of 2025 returning/paying back the money to the bank as per the terms and conditions of the cash credit facility.

12. In our prima facie view, the above allegation would fall under the term 'wilful default' under clause 3(t)(B) that reads as under :- "3(t)(B) the borrower has diverted the funds availed under the credit facility from lender."

13. However, this does not appear to be the reason for show cause notice and the subsequent passing of the order treating the petitioners as wilful defaulters.

14. We are also of the view that the submissions made by petitioners in their reply have not been taken into account and the reasons for holding the petitioners as wilful defaulters is tenuous and does not meet the criteria under the RBI guideline.

15. In light of the same, the impugned orders dated January 21, 2025 and May 28, 2025 are quashed and set aside with liberty granted to the bank to grant another opportunity of hearing to the petitioners, and thereafter, pass a fresh order keeping in mind the principles of natural justice.

16. With the above observations, this writ petition is disposed of.

17. We make it clear that the observations made in this order are prima facie and tentative in nature and would not bind the respondent bank in proceeding further.

18. The petitioners shall also be provided with the relied upon verification report dated February 1, 2022, that has not been provided to them till date, within a period of two weeks from date. September 15, 2025 Dev (Praveen Kumar Giri,J.) (Shekhar B. Saraf,J.)