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Key SC ruling helpful to banks

Legal consultants Devesh Juvekar, partner, and Dikshat Mehra, senior associate, of Rajani Associates, decipher the recent Supreme Court ruling on wilful defaulters:

Can you elucidate the recent Supreme Court ruling that a wilful defaulter has no right to be represented by a lawyer before an in-house committee investigating the wilful default?

The Supreme Court in the Jah Developers versus State Bank of India case had an opportunity to examine the much-debated issue as to whether a person, who is to be declared as a wilful defaulter under the RBI guidelines/circulars, is entitled to be represented by a lawyer of his choice before such a declaration is made. The special leave petition had arisen from a Delhi High Court’s order. The Supreme Court held that in-house committees are neither a tribunal, nor vested with any judicial powers. Their powers are only administrative in nature. The duty of such in-house committees is to only gather facts and then arrive at a result. The Supreme Court further held that, since such committees formed are also not persons legally authorized to take evidence by statute, or subordinate legislation, no lawyer would have any right to appear before such committees. Orders passed by the in-house committees will not affect a wilful defaulter in case he challenges such an order before a court of law.

How are in-house committees constituted?

An in-house committee constituted under the RBI Master Circular, 2015 is one which is headed by an executive director and consisting of 2 other senior officers of the rank of general manager / deputy general manager of a particular bank. This is referred to as a first committee, which decides whether an event of wilful default has occurred or not. The order of the first committee is then reviewed by another committee which is headed by the chairman / chairman & managing director, or the managing director & CEO and consisting, in addition, of 2 independent directors / non-executive directors of any bank. The order declaring a person a wilful defaulter shall become final only after it is confirmed by such a review committee. As mentioned above, since the in-house committee’s powers are only administrative in nature, the order/findings passed by such a review committee can always be challenged in a court of law. The apex court recently in Sarvepalli Ramaiah vs the district collector, Chittoor district case, has laid down broad guidelines about the judicial review of administrative decisions.

Is this ruling beneficial to banks and financial institutions? If so, how?

Over the years, banks always felt that with lawyers appearing before such in-house committees, it may only delay the process of declaration of a borrower as a wilful defaulter with their prolonging arguments. With the passing of the apex court’s verdict in Jah Developers case, one can now positively expect an expedited in-house proceeding, which will benefit the banks and financial institutions to declare a person as a wilful defaulter.

The Supreme Court has also been proactive in addressing the issue of wilful defaults.

The Supreme Court has been proactive in addressing the issue of wilful defaults and had recently directed the RBI to provide information to the general public under the RTI Act on defaulters. RBI in its circular dated 29 September 2016 had also instructed banks/financial institutions to publish only photographs of those persons who are declared as wilful defaulters. Such publication can only happen after following the mechanism as set out in the RBI circulars and after duly following the internal policies as framed by banks and financial instructions.
Recently, a committee headed by financial services secretary Rajeev Kumar has recommended to the government to empower public sector banks to directly request the concerned authorities to prevent wilful defaulters from fleeing from the country. In its recommendations, the committee had also noted that any restriction on foreign travel has to be based on reasonable justification and be tenable legally.

What could be the next course of action by the Supreme Court?

Well, with the government and the Supreme Court tightening the noose on wilful defaulters firstly by upholding the Insolvency and Bankruptcy Code, 2016 and now by not allowing lawyers to appear at in-house committees’ meetings, it will only seem to be beneficial for banks and financial institutions. When we look at the Supreme Court’s judicial pronouncements in the last few years, one thing is for sure that with growing issue of NPAs in the country, one can expect stricter directives coming from the Supreme Court in order to globally boost the investor confidence.

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