Bank’s Wilful Defaulter Declaration Based Solely on a Forensic Audit Report is Deemed Unsustainable | HC

Case Details: Ratul Puri v. Punjab National Bank - [2024] 160 taxmann.com 634 (HC-Delhi)

Judiciary and Counsel Details

• • Purushaindra Kumar Kaurav, J.
  • Dayan Krishnan, Sr. Adv. Vaibhav Mishra, Karan Batura, Ekansh Mishra & Jayant Chawla, Advs. for the Petitioner.
  • Sanjay Bajaj, Shivam Takkar & Sarthak Sehgal, Advs. for the Respondent.

Facts of the Case

In the instant case, Company ‘S’ availed credit facilitates from lender banks including the respondent for which a personal guarantee was given by the petitioner/executive director of ‘S’.

Later, the petitioner resigned as a director of ‘S’. Since, ‘S’ faced financial decline, a Corporate Debt Restructuring (CDR) package of ‘S’ was approved by lenders. In lieu of the said guarantee, ‘S’ in an undertaking offered a collateral security amount to the lender banks.

The RBI issued a master circular to declare a person as a wilful defaulter, if the unit had defaulted in loan repayment obligations and diverted funds for other purposes. Based on the forensic audit report of ‘S’, the respondent issued a show cause notice to the petitioner under the master circular, alleging that ‘S’ defaulted in meeting its loan repayment obligations and diverted funds for other purposes.

The wilful defaulter identification committee of the respondent declared the petitioner as a wilful defaulter. The petitioner assailed the same before the review committee of the respondent, however, the said representation was rejected vide the impugned order.

The petitioner contended that since he resigned as director of ‘S’, he could not be held liable for any act that transpired after he ceased to hold any position in ‘S’.

It was noted that the lender banks were aware of the nature of liabilities of ‘S’, however, neither before the approval of the CDR package nor thereafter, did they consider the same to be excessive.

Further, the respondent failed to discharge its obligations under the master circular and proceeded to invoke jurisdiction merely based on the said report, which itself did not record any conclusion of diversion of funds by ‘S’.

High Court Held

The High Court observed that the undertaking relied upon by the respondent was given by S, hence, if there existed a breach of the said undertaking, the remedy lies against ‘S’ and not against the petitioner. Hence, resignation from a company was not an act of wilful default.

The High Court held that while a forensic audit report could act as a piece of corroboration for the said exercise, it could not be the sole basis. Thus, the reasons assigned by the review committee confirming the petitioner as a wilful defaulter were deemed unsustainable. Therefore, the impugned order was to be set aside.