Reliance on Discredited Audit Report Criticized: Calcutta High Court Quashes Willful Defaulter Declaration

The Calcutta High Court, under Justice Sabyasachi Bhattacharyya, has overturned the decisions of the Willful Defaulter Identification Committee and the Review Committee of the Central Bank of India. The judgment, delivered on May 14, 2024, sharply criticized the reliance on a forensic audit report by Deloitte Touche Tohmatsu India, LLP, which had been previously discredited by judicial authorities. This verdict mandates the immediate reversal of all consequential actions, including the removal of the petitioners’ names from the willful defaulter list.

The case revolves around writ petitions filed by Vishambhar Saran and others challenging their designation as willful defaulters by the Central Bank of India. The primary evidence for this declaration was a Transaction Audit Report (TAR) by Deloitte Touche Tohmatsu India, LLP. However, this report had numerous disclaimers and was previously dismissed in insolvency proceedings by the NCLT and NCLAT. Despite the lead bank, Punjab National Bank, dropping charges against the petitioners, the Central Bank of India persisted, leading to the current legal challenge.

Credibility of Forensic Audit Report: The court scrutinized the Transaction Audit Report (TAR) prepared by Deloitte Touche Tohmatsu India, LLP, which was the primary evidence used by the First Committee to declare the petitioners as willful defaulters. Justice Bhattacharyya emphasized the numerous disclaimers within the TAR that highlighted its inconclusiveness and unsuitability for legal proceedings. “The Auditor Firm itself indicated in several places that the report was not conclusive, not independently verified, and should not form the sole basis for any decision,” the judgment noted.

Rejection by NCLT and NCLAT: The TAR had already been dismissed in related insolvency proceedings by both the National Company Law Tribunal (NCLT) and the National Company Law Appellate Tribunal (NCLAT). These judicial bodies had rejected the findings of the TAR, thereby undermining its credibility. The lead Bank of the Consortium, Punjab National Bank (PNB), had also dropped the charges of willful defaulter based on these rejections.

Procedural Irregularities: The court found significant procedural flaws in the Review Committee’s decision. Justice Bhattacharyya observed that the RC’s decision was “grossly mechanical,” with twenty-one entities being reviewed collectively without individualized reasoning. The decision lacked adherence to the principles of natural justice and the guidelines established by the Supreme Court in State Bank of India vs. Jah Developers Private Limited.

Justice Bhattacharyya extensively discussed the improper reliance on the TAR, noting that the First Committee’s decision was based solely on this discredited report. “The reliance on the TAR, which itself was inconclusive and discredited by judicial authorities, was improper and untenable,” the judgment stated. Furthermore, the court underscored that the RC’s decision did not provide a reasoned order as required by the Supreme Court’s guidelines.

Justice Bhattacharyya remarked, “The reliance solely on the TAR by the First Committee and RC was unjustified. The TAR itself contained multiple disclaimers, stating that it was not conclusive, not independently verified, and not suitable for legal proceedings.”

The Calcutta High Court’s judgment emphasizes the importance of credible evidence and due process in declaring individuals or entities as willful defaulters. By quashing the decisions of the Willful Defaulter Identification Committee and the Review Committee, the court has underscored the judiciary’s role in ensuring fair and just treatment. This ruling is expected to have significant implications for future cases involving willful defaulter declarations, reinforcing the need for robust and reliable evidence.

Date of Decision: May 14, 2024

Vishambhar Saran and Anr. Vs. Central Bank of India and Ors