Cal High Court Quashes Wilful Defaulter Declarations, Cites Procedural Violations and Unreliable Evidence

Reliance on TAR Without Independent Evidence is Unlawful, Rules High Court -In a significant ruling, the High Court at Calcutta has set aside the declarations of Vishambhar Saran and another petitioner as wilful defaulters, critiquing the reliance on a Transaction Audit Report (TAR) without independent corroborative evidence. The decision, rendered by Justice Sabyasachi Bhattacharyya, underscores the importance of adhering to procedural fairness and the need for robust, independent evidence in such declarations.

The High Court at Calcutta has quashed the declarations of the petitioners, Vishambhar Saran and another, as wilful defaulters by the First Committee and the subsequent affirmation by the Review Committee of the Central Bank of India. The court found the reliance on a Transaction Audit Report (TAR) prepared by Deloitte Touche Tohmatsu India, LLP, to be fundamentally flawed and procedurally unjust, thereby nullifying the wilful defaulter tags imposed on the petitioners.

The petitioners challenged the declarations made by the First Committee and upheld by the Review Committee, arguing that the decisions were based solely on the TAR without any independent verification. The TAR itself contained multiple disclaimers about its conclusiveness and suitability for legal reliance, further complicating its role as the sole basis for such a critical declaration.

Justice Bhattacharyya highlighted numerous disclaimers within the TAR that explicitly stated its findings were not conclusive, not intended for legal reliance, and were based on unverified information. The court noted, “The reliance on a report that disclaims its own veracity and legal reliability is fundamentally flawed. The TAR’s own assertions negate its use as the sole basis for any legal or financial decisions.”

The court found significant procedural lapses in the actions of the Review Committee, which grouped multiple entities in a single meeting without individual assessments and failed to provide a reasoned order. “The Review Committee’s mechanical approach in clubbing twenty-one entities together and failing to pass a reasoned order violates principles of natural justice and the Master Circular’s guidelines,” the court stated.

The ruling also emphasized that the Central Bank of India, as part of the lending consortium led by Punjab National Bank (PNB), was bound by the consortium’s decisions. The PNB had already dropped the wilful defaulter charges against the petitioners following the NCLT’s rejection of the TAR. The court ruled, “The Central Bank of India cannot act independently in contravention of the lead bank’s decision, especially when no independent material has emerged to substantiate its charges.”

The judgment extensively referred to the principles laid out in the Master Circular on Wilful Defaulters issued by the Reserve Bank of India (RBI) and the precedent set in State Bank of India vs. Jah Developers Private Limited and Others (2019) 6 SCC 787. The court reiterated that any declaration of wilful default must be based on clear, independent evidence and a thorough, fair process.

Justice Bhattacharyya remarked, “The corroboration provided by the medical evidence is a significant factor that lends credibility to the prosecution’s case, especially when witnesses turn hostile under duress.”

The High Court’s decision underscores the judiciary’s commitment to ensuring procedural fairness and the reliance on credible evidence in financial declarations. By setting aside the declarations of wilful default, the judgment reinforces the need for banks and financial institutions to adhere strictly to regulatory guidelines and natural justice principles. This landmark ruling is expected to have a significant impact on future cases, ensuring that wilful defaulter declarations are made with utmost diligence and fairness.

Date of Decision: May 14, 2024