First Committee On Wilful Defaulters Not Obligated To Mention Its Composition In Its Order: Telangana High Court

The High Court of Telangana Bench comprising of Justice K. Lakshman, while adjudicating a writ petition filed in the matter of Ms. Kanumuru Rama Devi v M/s REC Limited, has held that as per Clause 3(a) of the RBI Master Circular on Wilful Defaulters dated 01.07.2015, the First Committee is not obligated to disclose its formation and composition in its order. Further, the CGM (Law) can be authorized on behalf of Lender Bank to sign and issue the order on behalf of First Committee. BACKGROUND FACTS M/s. Ind Bharath Power (Madras) Ltd. ("Ind Bharath") had availed credit facilities from REC Ltd. ("Respondent"), Axis Bank and PFL for implementation of 660 MW Coal Based Thermal Power Project at Sasthavinallur and Pallakkurichi villages, Sattankulam Taluq, Tuticorin District of Tamilnadu State. At the relevant time, the Petitioners were the Directors of Ind Bharath. Thereafter, the Respondent had raised allegations of misutilization of its funds by Ind Bharath. Accordingly the Respondent issued a Show Cause Notice (SCN) dated 09.01.2019 as per the RBI Master Circular on Wilful Defaulters dated 01.07.2015 ("RBI Circular"), as to why the Petitioners should not be declared as 'willful defaulters'. The SCN alleged that the Petitioners had diverted and misutilized the borrowed funds to meet the liability/obligations of other group companies. On 03.05.2022 the Petitioners had tendered their response to the SCN. The First Level Committee met on 08.06.2022 and 14.06.2022 and concluded that the debt was sanctioned for the purpose of implementation of 660 MW Coal Based Thermal Power Project. The Petitioners defaulted in repayment of loan and the account was declared Non Performing Asset on 31.12.2016. The Petitioners were directly responsible for the diversion and siphoning of funds to the group companies. Due to which, the Project could not be constructed and the debt given by the lenders became NPA. The default was found to be deliberate and intentional. Thus, the First Committee vide its Order dated 16.06.2022 declared the Petitioners as Wilful Defaulters. The Petitioners filed a writ petition before High Court challenging the Order dated 16.06.2022. CONTENTIONS OF PETITIONERS Petitioners contended that as per Clause (3)(a) of the RBI Circular, the First Committee should be headed by an Executive Director or equivalent and consisting of two other Senior Officers of the rank of GM/DGM. However, the Order dated 16.06.2022 did not disclose formation of such committee. The Order was signed by CGM (Law), for and on behalf of REC Limited. The CGM is not authorized to sign the said order and First Committee has no power to delegate power to any official including the CGM (Law). Hence, the Order was illegal and liable to be set aside. CONTENTIONS OF RESPONDENT The Respondent argued that the Petitioners were vying to stall the wilful default proceedings at every stage. The First Committee authorized the CGM to sign and issue the order. The composition of the committee need not be motioned in the order dated 16.06.2022. RELEVANT CLAUSE Clause 3(a) of the RBI Master Circular on Wilful Defaulters dated 01.07.2015 "3(a) The evidence of willful default on the part of the borrowing company and its promoter/whole-time director at the relevant time should be examined by a Committee headed by an Executive or Equivalent and consisting of two other senior officers of the rank of GM/DGM". DECISION OF THE COURT The Bench observed that As per Clause (3)(a) of the RBI Circular, the First Committee shall be headed by an Executive Director or equivalent and consisting of two other Senior Officers of the rank of GM/DGM. It does not say that order of the First Committee shall contain the composition and formation of such committee. However, in the order dated 16.06.2022 there is specific mention about the meetings held by First Committee on 08.06.2022 and 14.06.2022. The reasons were specifically assigned in the order dated 16.06.2022. "Thus, there is no mention in the aforesaid clause (3)(a) that the order shall refer formation and composition of the said committee. The impugned order was signed by the CGM (Law). In the said order itself it is specially mentioned that "the committee has authorized the undersigned to sign and issue this order". Therefore, the CGM (Law) signed the order for and on behalf of the respondent. As per master Circular of RBI dt.01.07.2015 there is no bar or prohibition authorizing CGM(Law) of respondent, so sign and issue said order." It was further observed that the First Level Committee met on 08.06.2022 and 14.06.2022 and after examination, has found the petitioners guilty of willful default. There is no delegation of power by the committee as alleged. Further, Clause 3(c) of the RBI Circular states that the order passed by the First committee 'should' be reviewed by Review Committee and the Order...

First Committee On Wilful Defaulters Not Obligated To Mention Its Composition In Its Order: Telangana High Court

Pallavi Mishra

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First Committee On Wilful Defaulters Not Obligated To Mention Its Composition In Its Order: Telangana High Court

Pallavi Mishra

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