Steel Hypermart INDIA vs. Bank Of Baroda

Facts

The petitioners, Steel Hypermart India Private Limited and its directors, challenged a show-cause notice dated July 22, 2021, issued by the Assistant General Manager of Bank of Baroda (R-5), proposing to classify them as willful defaulters. They also challenged the Review Committee's order dated July 28, 2022, which declared them as willful defaulters. The petitioners argued that they were denied a personal hearing, violating principles of natural justice, and that the bank failed to follow RBI guidelines and Central Government circulars. They also contended that the pendency of proceedings under the Insolvency and Bankruptcy Code (IBC) imposed a statutory moratorium, preventing coercive action. The bank argued that the petitioners were not scrupulous borrowers, had multiple opportunities to repay, and that the action was taken in accordance with RBI guidelines after providing opportunities for representation.

Held

The Court declined to grant indulgence. Regarding the first issue, the Court found that while the petitioners were initially offered a personal submission, the participation of Chartered Accountants or Advocates was not permitted. However, the Court noted that the petitioners failed to demonstrate how this specific restriction prejudiced their case, stating that the violation of natural justice cannot be claimed without demonstrable prejudice. The Court also observed that the petitioners repeatedly sought extensions for submitting their reply, and their requests lacked bona fide, especially in light of their failure to make any payment towards their substantial outstanding debts, despite an interim order from the Court. Regarding the second issue, the Court held that proceedings for declaring a willful defaulter are not for recovery of debt but for disseminating information to other lending banks. Citing the Kolkata High Court in ADARSH JHUNJHUNJWALA vs. STATE BANK OF INDIA and the Apex Court in SBI vs. RAMAKRISHNAN, the Court stated that the willful defaulter proceedings aim to put other banks on notice. Furthermore, the Court clarified that the moratorium under Section 14 of the IBC is confined to the corporate debtor, while Section 96 covers debt, and in any event, the moratorium clauses are not invocable as they are not intended to allow wrongdoers to escape. Therefore, the action of the bank was not faltered.

Key Issues

1. Whether the impugned show-cause notice and the subsequent order declaring the petitioners as willful defaulters are liable to be quashed on the ground of violation of principles of natural justice, specifically the denial of a personal hearing, and non-compliance with extant RBI guidelines and Central Government Circulars regulating the classification of willful defaulters? (Question of law and mixed fact and law, turning on principles of natural justice and administrative procedure). 2. Whether the pendency of proceedings under the Insolvency and Bankruptcy Code, 2016, particularly the moratorium provisions, bars the respondent-bank from taking coercive proceedings, including the classification of the petitioners as willful defaulters? (Question of law, turning on Sections 14 and 96 of the IBC). Petitioner's Arguments: - Violation of principles of natural justice due to denial of personal hearing despite demand. - Non-adherence to RBI guidelines and Central Government Circulars for declaring willful defaulters. - Statutory moratorium under IBC prevents coercive proceedings. Revenue/State's Arguments: - Petitioners are not scrupulous borrowers and have failed to repay debts despite opportunities. - Action taken in accordance with RBI guidelines and after providing opportunities for representation, thus complying with natural justice. - Plea of moratorium under IBC is not applicable to the petitioners.