Borrowers Pays Full Compromise Amount: Allahabad High Court Directs Bank To Reconsider Wilful Default

Background Facts

Konarkagro Polytech Pvt. Ltd. (“Petitioner”) had availed financial facilities from Bank of Baroda (erstwhile Vijaya Bank) from 2016 onwards. The account of the Petitioner was declared Non Performing Asset (NPA) in 2019 and recovery proceedings were initiated by the Bank before the Debt Recovery Tribunal.

In 2021, while One Time Settlement (“OTS”) Proposal of the Petitioner was under consideration, the Committee of Executives on Wilful Defaulters (“First Committee”) had issued a Show Cause Notice (“SCN”) to the Petitioner on 08.03.2021. On 26.03.2021 the Petitioner responded to the SCN bringing on record that an OTS proposal was being negotiated upon and amounts were being paid to the Bank.

The First Committee had granted the Petitioner Company an opportunity for personal hearing, which was to be conducted in another city in July 2021. The Petitioner Company had sought adjournment of personal hearing due to ongoing fatal second wave of COVID-19 and vulnerable medical conditions of its representatives. The First Committee did not respond to the adjournment request and hence no personal hearing could be conducted on the due date. While the Petitioner was paying further amounts towards OTS proposal, the First Committee vide its order dated 29.07.2021 had declared the Petitioners as wilful defaulters. The Petitioner requested the First Committee to first conduct a personal hearing and consider the Petitioner’s response dated 26.03.2021 before arriving upon any decision. However, the requests were not taken into account.

On 18.10.2021, the Review Committee affirmed the First Committee’s Order and declared Petitioner as wilful defaulter.

Subsequently, the Petitioner Company entered into a consolidated One Time Settlement with the Bank on 18.06.2022, which included accounts of other entities as well. The Petitioner Company paid the full compromise amount in respect to its accounts in the consolidated OTS. Thereafter, requests were made before the Bank to recall the orders declaring the Petitioner as wilful defaulter but no response was received. Therefore, the Petitioner challenged the Orders dated 29.07.2021 and 18.10.2021 before the Allahabad High Court under Article 226 of the Constitution of India. The Reserve Bank of India was also impleaded as a party by the Court.

Contentions Of The Petitioner

The Petitioner argued that allegation of wilful default cannot survive in a scenario where the borrower subsequently enters OTS and pays the full compromise amount. The Petitioner cannot be declared a wilful defaulter in absence of any ‘wilful’ element in default.

Further, the Orders declaring the Petitioner as wilful defaulter were unreasoned; failed to disclose the coram of committees; did not weigh their defences against the allegations; and did not disclose the evidence or documents relied upon for arriving at the decision. Also, the Review Committee’s Order was passed in contravention to the Supreme Court judgment in State Bank of India v Jah Developers, (2019) 6 SCC 787, which mandates the Review Committee to pass a reasoned order. It was submitted that the Petitioners had sought adjournment to the personal hearing over genuine medical grounds. Hence, a fair opportunity of personal hearing could not be denied to them.

High Court Verdict

The Bench observed that the Petitioner Company’s sister concern, namely Orbitz Irrigation Pvt. Ltd., was also declared a wilful default by Bank of Baroda. However, the Supreme Court vide an order dated 19.09.2022 passed in Orbitz Irrigation Pvt. Ltd. & Ors. v Bank of Baroda & Anr., SLP (C) No. 15751 of 2022, had permitted Orbitz Irrigation Pvt. Ltd. to approach the Bank with request to review its decision of declaring them as a "wilful defaulter", in view of the settlement arrived at between the Company and the Bank. The operative portion of the Supreme Court judgment is as under:

“Learned counsel for the petitioners points out that after the High Court's decision, the Bank has entered into One Time Settlement with the petitioners vide letter dated 14.6.2022, and as per the agreed terms and conditions, they have started making payments for which a separate account "NO Lien RO SARB" has been opened by the Bank. The petitioners are stated to have deposited a sum of Rs. 17 Crores and 55 Thousands so far. In the light of the above changed circumstances and subsequent events, it appears to us that the petitioners are well within their right to represent the Bank for reconsideration of its earlier decision whereby the petitioners have classified as "Wilful defaulters”.

The Bench recorded the consent of Bank and RBI to dispose of the petition in terms of the Supreme Court judgment dated 19.09.2022. The Bench directed the Bank to reconsider its decision of declaring the Petitioners as wilful defaulters, if a representation is made by them to the Bank. Further liberty has been granted to the Petitioners to avail legal remedy if the Bank’s decision on the representation is not favourable to them.

Case Title: Konarkagro Polytech Pvt. Ltd. & Ors. v Bank Of Baroda & Ors. [WRIT - C No. - 35965 of 2022]

Citation: 2023 LiveLaw (AB) 59

Counsel for Petitioners: Adv. Pallavi Mishra and Adv. Ashok Kumar Pandey.

Counsel for Respondents: Adv. Avinash Jaiswal and Adv. Gaurav Gautam.

ClickHere To Read/Download Order