Facts of the Case

Steel Hypermart India Private Limited and its Directors filed a writ petition before the Karnataka High Court challenging the show cause notice dated 22.07.2021 and the subsequent order dated 28.07.2022 whereby Bank of Baroda classified them as willful defaulters.

The petitioners contended that despite requesting a personal hearing, the Bank proceeded with the declaration without granting one. They further argued that proceedings under the Insolvency and Bankruptcy Code, 2016 (IBC) were pending, and therefore the Bank could not initiate or continue coercive proceedings because of the statutory moratorium.

The Bank opposed the petition, stating that adequate opportunities had been granted to the petitioners to submit their explanation and make personal submissions, but the petitioners repeatedly sought extensions without demonstrating any bona fide intention to repay the outstanding dues.

Issues Involved

  1. Whether the declaration of the petitioners as willful defaulters violated the principles of natural justice due to denial of a personal hearing.
  2. Whether the Bank complied with the RBI Guidelines governing identification of willful defaulters.
  3. Whether the pendency of insolvency proceedings under the Insolvency and Bankruptcy Code bars proceedings for declaring borrowers as willful defaulters.
  4. Whether repeated requests for extension of time without repayment constitute sufficient compliance by the borrower.

Petitioner's Arguments

  • The petitioners submitted that they were denied an effective opportunity of personal hearing despite specifically requesting one, thereby violating the principles of natural justice.
  • It was argued that the Bank failed to strictly comply with the RBI Guidelines and Central Government Circulars regulating the declaration of borrowers as willful defaulters.
  • The petitioners contended that the GST Departments of Karnataka and Tamil Nadu had seized important documents, preventing them from submitting an effective reply within time.
  • They further argued that since insolvency proceedings under the Insolvency and Bankruptcy Code were pending, the statutory moratorium prohibited the Bank from continuing proceedings relating to the declaration of willful defaulters.

Respondent's Arguments

  • Bank of Baroda contended that the petitioners had defaulted on repayment of substantial amounts running into several crores of rupees.
  • The Bank submitted that multiple opportunities were granted to file replies and representations, including extensions of time and permission to make personal submissions.
  • The respondents argued that the petitioners repeatedly sought extensions without making any repayment or demonstrating bona fide conduct.
  • The Bank maintained that the declaration as willful defaulters was made strictly in accordance with RBI Guidelines after following due procedure.
  • It was further contended that proceedings for declaring a borrower as a willful defaulter are distinct from debt recovery proceedings and therefore are not barred by the moratorium under the Insolvency and Bankruptcy Code.

Court Order / Findings

The Karnataka High Court dismissed the writ petition and upheld the Bank's decision declaring the petitioners as willful defaulters.

The Court observed that:

  • The petitioners had been granted several opportunities to submit explanations and representations.
  • Repeated requests for extension of time, without making any repayment or establishing bona fide conduct, could not invalidate the proceedings.
  • Mere allegation of violation of natural justice is insufficient unless actual prejudice resulting from such violation is demonstrated.
  • Even assuming that a personal hearing was not granted, the petitioners failed to show what additional submissions they would have made which could have altered the decision.
  • Proceedings for declaring a borrower as a willful defaulter are intended to disseminate information regarding defaulting borrowers and are not recovery proceedings.
  • Consequently, the moratorium under Section 14 of the Insolvency and Bankruptcy Code does not prohibit such proceedings.
  • The Court relied upon judicial precedents including SBI vs. Ramakrishnan, Adarsh Jhunjhunwala vs. State Bank of India, and Manish Kumar vs. Union of India while rejecting the petition.

Accordingly, the writ petition was dismissed.

Important Clarification

The judgment reiterates that:

  • A borrower cannot successfully challenge a declaration as a willful defaulter merely by alleging denial of personal hearing unless actual prejudice is established.
  • Repeated requests for extension without demonstrating bona fide repayment efforts do not invalidate proceedings.
  • Proceedings for declaring a borrower as a willful defaulter are independent of debt recovery proceedings.
  • The moratorium under the Insolvency and Bankruptcy Code does not automatically bar willful defaulter proceedings.
  • Banks are entitled to continue proceedings for classification as willful defaulters when RBI Guidelines have been substantially followed.

Link to Download the Order

https://www.mytaxexpert.co.in/uploads/1785325516_2251compressed.pdf 

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